You pay income tax on savings interest, just like wages

The interest your bank pays you on a savings account is taxable income. That means you owe federal income tax on it, and possibly state income tax too, depending on where you live. The bank does not take the tax out automatically — you report it yourself when you file your tax return.

The amount of tax you pay depends on your total income for the year and your tax bracket. Someone earning $30,000 a year pays a lower percentage on savings interest than someone earning $150,000. If your savings interest is your only income, you might owe no federal tax at all if you fall below the threshold for your filing status.

Your bank will send you a form called a 1099-INT in January or February each year if you earned $10 or more in interest during the previous year. This form lists exactly how much interest you earned. You use this number when you file your taxes.

Key Takeaways

  • Savings account interest counts as income and is taxed at your ordinary income tax rate, which varies based on your total earnings for the year.
  • Your bank sends you a 1099-INT form if you earned $10 or more in interest, and you report that amount on your tax return.
  • Federal tax is required, and most states also tax savings interest unless you live in one of the few states with no income tax.
  • High-yield savings accounts earn more interest, which means you owe more tax, but the after-tax return is usually still better than a regular savings account.

How your tax bracket determines what you actually owe

The tax rate on your savings interest is not a flat percentage — it depends on your tax bracket, which is determined by your total income. If you earn $25,000 a year and your savings interest adds $100, that $100 is taxed at the same rate as your last dollar of wages.

For 2024, federal tax brackets for single filers start at 10% for income up to about $11,600, then jump to 12% for income between roughly $11,600 and $47,150, and continue upward from there. If your total income (wages plus interest) falls in the 12% bracket, you pay 12% federal tax on your savings interest. If you are in the 22% bracket, you pay 22%.

This is why two people earning the same amount of savings interest can owe different amounts of tax. A retiree with $20,000 in Social Security and $500 in savings interest might owe less tax than a working person earning $80,000 in wages plus the same $500 in interest.

State income tax on savings interest

Most states tax savings interest the same way the federal government does — as ordinary income. Your state tax rate varies by state and by your income level within that state, just like federal tax.

Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, but is phasing that out). If you live in one of these states, you owe no state tax on your savings interest, only federal.

If you live in any other state, you will owe state income tax on your savings interest. Some states have a flat tax rate — Illinois taxes all income at 4.95%, for example. Others use brackets like the federal system. Check your state's tax website or ask a tax preparer what rate applies to you.

The 1099-INT form and what to do with it

In January or February, your bank mails or emails you a 1099-INT if you earned $10 or more in interest during the previous calendar year. This form shows the total interest paid to you. You receive one copy and the bank sends another to the IRS.

When you file your federal tax return, you report the amount from your 1099-INT on Schedule 1 (Form 1040), which feeds into your total income. If you use tax software, it usually walks you through entering this number. If you file by hand or with a tax preparer, bring the 1099-INT with you.

Keep your 1099-INT with your tax records for at least three years. If the IRS ever questions your return, you will need to show that the interest amount matches what the bank reported.

Interest from multiple banks and accounts

If you have savings accounts at more than one bank, each bank that paid you $10 or more in interest sends its own 1099-INT. You add up all the interest from all the forms and report the total on your tax return.

Some people keep track of their interest throughout the year to estimate their tax bill, especially if they have a large balance earning high interest. Your bank's online portal usually shows interest earned month by month, so you can add it up yourself if you want to know the total before the 1099-INT arrives.

High-yield savings accounts and tax impact

A high-yield savings account earns significantly more interest than a regular savings account — sometimes 4% to 5% annually, compared to 0.01% or less at traditional banks. This is good for your savings, but it also means you owe more tax on the interest.

Even so, the after-tax return on a high-yield account is usually better than a regular account. If you earn $500 in interest at a high-yield account and owe $110 in federal and state tax (assuming a combined 22% rate), you keep $390. At a regular savings account earning $5 in interest, you might owe $1.10 in tax and keep $3.90. The high-yield account still comes out ahead.

The tax does not change the math: more interest earned means more tax owed, but also more money in your account after tax.

What happens if you do not receive a 1099-INT

If you earned less than $10 in interest during the year, your bank does not send a 1099-INT. You still owe tax on that interest, though the amount is small. You can report it on your tax return even without the form — the IRS expects you to report all income, whether or not you receive a form.

If you earned $10 or more and your bank did not send a 1099-INT by late February, contact the bank and ask for it. Banks sometimes send them late, or to an old address. If the bank cannot locate it, ask for a duplicate or a written statement of the interest paid.

Frequently Asked Questions

Do I have to report savings interest if it is under $10?

Technically yes — you owe tax on all income, including small amounts of interest. In practice, the tax owed on $5 or $8 in interest is negligible. Most people report it anyway because it is easier than trying to track what counts as "too small to report."

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount on your 1099-INT. Fees are not deductible against interest income for most people. However, if you have significant investment expenses, you may be able to deduct them in limited situations — consult a tax preparer about your specific case.

What if I opened a savings account late in the year — do I still owe tax on the interest?

Yes. You owe tax on all interest earned during the calendar year, regardless of when you opened the account. If you opened it in November and earned $50 in interest by December 31, that $50 is taxable income for that year.

Does moving money between my own savings accounts count as income?

No. Transferring money from one account to another is not income — it is just moving your own money around. Only the interest the bank pays you is taxable.

What if I earned interest in a joint account — how much tax do I owe?

The bank reports the total interest on the 1099-INT. If the account is joint with your spouse and you file taxes jointly, you report the full amount together. If it is joint with someone else, you and that person split the interest based on your ownership share, and each of you reports your portion on your own tax return.