You pay income tax on savings interest at your ordinary tax rate

The interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on the full amount. Your tax rate depends on your total income for the year and your filing status, not on how much interest you earned.

If you earned $50 in savings interest and you're in the 22% federal tax bracket, you owe roughly $11 in federal tax on that interest. Some states also tax savings interest as income, though a handful do not. The bank does not automatically withhold this tax — you report it yourself when you file your return.

The one exception is interest in a Roth IRA or 529 education savings plan. Money inside those accounts grows tax-free, and you pay no tax on the interest when you withdraw it (under the right conditions). But interest in a regular savings account, money market account, or certificate of deposit is always taxable.

Key Takeaways

  • Savings account interest counts as ordinary income and is taxed at your regular federal income tax rate, which ranges from 10% to 37% depending on your total income.
  • You report interest income on your tax return using the 1099-INT form your bank sends you in January, which shows how much interest you earned in the previous year.
  • Some states do not tax interest income at all, while others tax it as regular income; check your state's rules if you live outside the nine states with no income tax.
  • Interest earned in tax-advantaged accounts like Roth IRAs and 529 plans is not taxed, but interest in regular savings accounts, money market accounts, and CDs is always taxable.

How the IRS knows about your interest income

Your bank reports all interest paid to you on a form called the 1099-INT. The bank sends you a copy by January 31 each year, and it also sends a copy to the IRS. The amount shown is the total interest you earned in that calendar year, regardless of whether you withdrew it or left it in the account.

If you earned more than $10 in interest during the year, the bank must issue a 1099-INT. If you earned less, the bank may still send one — it depends on the bank's policy. Either way, you are responsible for reporting the interest on your tax return, even if you do not receive a 1099-INT.

The IRS cross-checks the 1099-INT against your tax return. If you do not report interest that the bank reported, the IRS will notice the discrepancy and may send you a notice asking for the missing tax or an explanation.

Federal tax brackets and what your interest rate means for your bill

Your tax rate on savings interest is not a flat percentage — it depends on your total income for the year. The IRS uses tax brackets, which are income ranges with different rates. For 2024, the federal brackets range from 10% (the lowest) to 37% (the highest). Your interest is taxed at whatever bracket your total income falls into.

If you earned $50,000 in wages and $200 in savings interest, your total taxable income is $50,200. That $200 in interest is taxed at the same rate as your last dollar of wages. If you are single and your total income is $50,200, you fall into the 22% bracket, so you owe about $44 in federal tax on that interest.

The brackets change every year and vary by filing status (single, married filing jointly, head of household, and so on). The IRS publishes the current brackets each January. If your income is very low, you may not owe any tax at all — there is a threshold called the standard deduction below which you owe no federal income tax. For 2024, the standard deduction is $14,600 for a single person and $29,200 for married couples filing jointly.

State income tax on savings interest

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 dividend income, but many savings accounts fall outside that rule). If you live in one of these states, you owe no state tax on your savings interest.

Every other state taxes interest as ordinary income, usually at rates between 2% and 13%. Some states use a flat rate — for example, Illinois taxes all income at 4.95%. Others use brackets similar to the federal system. A few states offer small exemptions for interest income, but these are rare and usually explore only to retirees or people over a certain age.

You report state interest income on your state tax return, which you file at the same time as your federal return. Your state tax bill is separate from your federal bill, so you may owe tax to both.

When interest compounds and when you owe tax

You owe tax on interest in the year it is credited to your account, not the year you withdraw it. If your savings account earns $50 in interest on December 31 and the bank credits it to your account that day, you owe tax on that $50 in the current year, even if you do not touch the money until next year.

This matters for accounts that compound interest frequently. A high-yield savings account might credit interest daily or monthly. Each time interest is credited, it becomes taxable income for that year. If you earn $100 in interest over twelve months and it is credited monthly, you report the full $100 on your tax return for that year — not $100 divided across twelve years.

The exception is accounts where interest is not credited until maturity, such as some certificates of deposit. With a CD that matures in two years, you may owe tax on the interest in the year the CD matures, not the year you bought it — but this depends on the type of CD and how it is structured. Ask your bank if you are unsure.

Tax-advantaged accounts where interest is not taxed

A Roth IRA is a retirement account where interest and investment gains grow tax-free. You pay no federal or state tax on the interest earned inside the account, and you pay no tax when you withdraw the money in retirement (as long as you follow the rules). The tradeoff is that you can only contribute a limited amount each year ($7,000 in 2024 for people under 50), and you cannot withdraw the earnings until you are 59½ without a penalty.

A 529 plan is a college savings account where interest and investment gains grow tax-free as long as you use the money for education expenses. If you withdraw money for non-education purposes, you owe tax on the earnings portion and a 10% penalty. Some states also offer a state income tax deduction for 529 contributions, which reduces your taxable income in the year you contribute.

A Health Savings Account (HSA) works similarly — interest grows tax-free if you use withdrawals for may have access to medical expenses. If you withdraw for other reasons, you owe tax on the earnings and a 20% penalty.

What to do if you earned very little interest

If you earned less than the standard deduction for your filing status, you may not owe any federal income tax at all, even if you earned interest. For example, if you are single, earned $10,000 in wages, and earned $500 in savings interest, your total income is $10,500. The standard deduction for a single person in 2024 is $14,600, so you owe no federal tax.

You still need to report the interest on your tax return if you file one. Many people file even when they do not owe tax because they may be due a refund from taxes withheld on wages. If you do not file and the IRS receives a 1099-INT from your bank, the IRS may contact you to ask why you did not report the income.

If you earned interest but your total income is below the standard deduction, use the IRS Free File program or a free tax software to file your return. The IRS website lists all free options at IRS.gov.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

The bank is not required to send you a 1099-INT if you earned less than $10, but you still owe tax on the interest if your total income is above the standard deduction. Report it on your return even if you do not receive a form. If you earned less than the standard deduction, you may not owe tax, but you should still report it.

Can I deduct savings account fees from my interest income?

No. You report the full interest amount on your tax return. Fees are not deductible against interest income. However, if you paid investment advisory fees or fees related to managing taxable investments, those may be deductible under certain conditions — but ordinary savings account maintenance fees are not.

What if I moved money between banks and earned interest at both?

Each bank sends you a separate 1099-INT for the interest it paid. You report the total interest from all accounts on your tax return. The IRS receives copies of all the 1099-INTs, so make sure your return shows the combined total.

Do I owe tax on interest I earned but did not withdraw?

Yes. You owe tax on interest in the year it is credited to your account, whether you withdraw it or leave it there. The only exception is certain types of CDs or bonds where interest is not credited until maturity.

Is interest from a joint savings account split between two people for tax purposes?

Not automatically. The bank reports the full interest amount on a single 1099-INT. You and the other account owner must decide how to split the interest for tax purposes — usually based on who contributed the money or your ownership percentage. Report your share on your tax return and keep records of how you split it in case the IRS asks.