The IRS treats savings account interest as ordinary income, taxed at your regular income tax rate

Every dollar of interest your savings account earns is taxable income. The bank does not withhold tax automatically — you owe it when you file your tax return. The tax rate depends on your total income for the year and your filing status, not on the size of the interest itself. If you earned $50 in interest and you are in the 22% federal tax bracket, you owe roughly $11 in federal tax on that interest alone.

The IRS requires banks to report interest earnings to both you and the tax agency. You will receive a Form 1099-INT from your bank by January 31 each year, listing all interest paid to your account during the previous calendar year. This form goes to the IRS as well. If you do not report the interest on your tax return, the IRS will notice the discrepancy because they have a copy of the 1099-INT.

State and local taxes also explore in most places. Some states tax savings interest at the same rate as federal income tax; others tax it differently or exempt it for certain account holders. Your city or county may add a local income tax on top of state tax. The total tax burden varies significantly by location.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax rate, which ranges from 10% to 37% depending on your total income and filing status.
  • Your bank sends you a Form 1099-INT by January 31, reporting all interest earned that year, and sends a copy to the IRS.
  • You must report this interest on your federal tax return even if the amount is small, because the IRS already has the bank's report.
  • State and local income taxes also explore to savings interest in most places, adding to your total tax bill.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw the money, but interest in a regular savings account is taxed every year.

How federal tax brackets work with savings interest

Your savings interest gets added to all your other income — wages, self-employment income, investment gains — and taxed together. The IRS uses tax brackets that change each year. In 2024, for example, a single filer earning $11,600 to $47,150 falls into the 12% bracket, meaning the last dollars earned (including interest) are taxed at 12%. Someone earning over $191,950 pays 32% on the top portion of their income.

This matters because a small amount of interest might push you into a higher bracket. If you earn $47,000 in wages and $500 in savings interest, that $500 is taxed at 12% (your bracket), not at a lower rate. If you were already at the top of the 12% bracket, the interest might push some of your income into the 22% bracket instead.

The brackets are adjusted annually for inflation, so the income thresholds change year to year. The IRS publishes updated brackets in the fall for the following tax year.

When you must report interest, and when you might not

The IRS requires you to report all interest income on your tax return, with one exception: if your total interest from all sources is less than $10 in a year, you do not have to report it. However, your bank will still send you a 1099-INT if the account earned any interest at all, so the IRS will have the information. Reporting the small amount is safer than omitting it.

If you have multiple savings accounts, CDs, or money market accounts, you add up the interest from all of them. A 1099-INT from each institution will arrive separately, but you combine the totals on your tax return. If one bank paid $8 and another paid $7, you report $15 total and owe tax on the full amount.

Joint account holders each receive their own 1099-INT showing their share of the interest. If you and your spouse own a joint savings account, the bank divides the interest between you based on ownership percentages (usually 50/50 unless you specify otherwise). Each of you reports your portion on your individual return.

Tax-advantaged accounts that defer or avoid interest taxation

Interest earned inside a traditional IRA or 401(k) is not taxed in the year it is earned. The money grows tax-free until you withdraw it in retirement, at which point withdrawals are taxed as ordinary income. This is a major advantage over a regular savings account, where you pay tax every year on the interest.

A Roth IRA works differently: you contribute after-tax dollars, and interest earned inside the account is never taxed, even when you withdraw it in retirement. If you meet the income limits and contribution rules, a Roth IRA can be the most tax-efficient place to hold savings.

Health Savings Accounts (HSAs) also grow tax-free if the money is used for may have access to medical expenses. Interest earned in an HSA is not taxed as long as you spend the money on may be able to access healthcare costs.

Regular savings accounts offer no tax break. The interest is taxed every year, regardless of whether you withdraw the money or leave it in the account.

State and local taxes on savings interest

Most states tax savings interest as part of your state income tax. The state tax rate varies widely: some states have no income tax at all (Florida, Texas, Wyoming, and others), while others tax interest at rates up to 13% or higher. A few states offer limited exemptions for interest earned by retirees or people over a certain age.

If you live in a state with local income tax — cities or counties that collect their own tax — that adds another layer. New York City, for example, taxes residents on savings interest at a local rate on top of state and federal taxes. Your total tax bill on $100 in interest could be $10 in federal tax, $6 in state tax, and $4 in local tax, depending on where you live.

Some states exempt interest from tax if it is earned in an account held for a minor or if the account holder is over 65. Check your state's tax authority website or speak with a tax preparer to understand what applies to your situation.

How to report interest on your tax return

You report savings interest on Schedule B (Interest and Ordinary Dividends) if your total interest and dividends exceed $1,500. If your interest is $1,500 or less, you can report it directly on Form 1040 (the main federal tax form) without filing Schedule B. Either way, the amount goes into your total income and is taxed at your bracket rate.

When you file, you will need the information from your 1099-INT forms. The form shows the account number, the institution name, and the total interest paid. If you received multiple 1099-INTs, add them all together and report the combined total. If the amount on the 1099-INT does not match your records, contact the bank to request a corrected form before you file.

If you file electronically, tax software will walk you through entering the interest amounts. If you file by paper, you attach Copy B of your 1099-INT forms to your return.

What happens if you do not report interest income

The IRS matches 1099-INT forms filed by banks against the income reported on tax returns. If you receive a 1099-INT and do not report the interest, the IRS will eventually notice. They may send you a notice of underreported income, which triggers a bill for the unpaid tax plus interest and penalties. The penalty for negligence is typically 20% of the underpaid tax, and the IRS charges interest on the unpaid amount from the original due date.

If the underreporting is deemed intentional fraud rather than an honest mistake, the penalty can be as high as 75% of the underpaid tax. Even small amounts of unreported interest can trigger an audit or correspondence from the IRS.

Reporting the interest, even if it is a small amount, takes a few minutes and avoids this risk entirely.

Frequently Asked Questions

Do I have to pay tax on interest if I do not withdraw the money?

Yes. The IRS taxes interest in the year it is earned, whether you withdraw it or leave it in the account. You owe tax on the interest even if you never touch the principal. This is why savings accounts are less tax-efficient than retirement accounts like IRAs, where interest can grow without annual taxation.

What if my savings account earned less than $10 in interest?

You do not have to report interest under $10, but your bank will still send a 1099-INT to the IRS if any interest was paid. Reporting it anyway is the safest approach. The tax owed on a small amount is minimal, and reporting it prevents any discrepancy between what the IRS has on file and what you report.

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

No. You report the full interest amount shown on the 1099-INT. Account fees, maintenance charges, and other costs are not deductible against interest income. However, if a bank charged you a fee and also paid interest, the 1099-INT shows the interest before fees are subtracted.

Is interest from a money market account taxed the same way as savings account interest?

Yes. Money market accounts are treated identically to savings accounts for tax purposes. The interest is taxed as ordinary income in the year it is earned, and the bank sends a 1099-INT. The only difference is the interest rate, which is typically higher in a money market account.

Do I owe tax on interest if I close the account before the end of the year?

Yes. You owe tax on all interest earned during the calendar year, regardless of when you close the account. If you earned $50 in interest by June and then closed the account, you still report the $50 on your tax return and owe tax on it.