Savings account interest counts as income the IRS taxes every year
Any interest your savings account earns is taxable income. The bank or credit union reports it to the IRS on a Form 1099-INT, and you report it on your tax return. There is no threshold below which interest becomes tax-free — even $1 of interest is technically taxable, though the IRS only requires banks to send you a 1099-INT when interest reaches $10 or more in a calendar year.
The tax rate depends on your overall income and tax bracket. Interest is taxed as ordinary income, meaning it is taxed at the same rate as wages or salary. If you earn $500 in savings interest and you are in the 22% federal tax bracket, you owe roughly $110 in federal tax on that interest alone (before state taxes, which vary by location).
The practical impact is small for most people because savings account interest rates are low. A $10,000 balance earning 4% annually generates $400 in interest — taxable, but not a large amount. However, if you have multiple accounts, high balances, or accounts at banks offering higher rates, the tax bill grows quickly and is worth planning for.
Key Takeaways
- All savings account interest is taxable income, reported to the IRS on Form 1099-INT when it reaches $10 or more per year.
- Interest is taxed at your ordinary income tax rate, which depends on your total income and tax bracket for the year.
- You report interest income on your tax return even if you do not receive a 1099-INT, so keep track of all accounts.
- High-yield savings accounts generate more interest and therefore more tax liability than traditional savings accounts.
How the IRS tracks your interest income
Banks and credit unions are required to report interest to the IRS using Form 1099-INT. You receive a copy in January or early February for the previous calendar year. The form shows the total interest earned across all accounts you hold at that institution.
If you have accounts at multiple banks, you will receive separate 1099-INT forms from each one. You are responsible for adding them all together when you file your tax return. The IRS receives copies of all 1099-INT forms sent to you, so underreporting interest is caught during processing.
If you close an account mid-year, the interest earned up to that point still gets reported on the 1099-INT for that year. Interest accrues daily but is usually credited monthly, so the timing of when you close an account matters less than the total interest earned during the calendar year.
What tax bracket your interest falls into
Interest income is added to your other income — wages, self-employment earnings, investment gains — to determine your total taxable income for the year. Your tax bracket is then based on that total. This means the tax rate on your interest depends on how much you earned from all sources.
If you earned $50,000 in wages and $500 in interest, your interest is taxed at whatever bracket applies to that combined $50,500. For 2024, that is likely the 22% federal bracket for a single filer. If you earned $200,000 in wages, the same $500 in interest would be taxed at a higher rate because it pushes you further into the 32% or 35% bracket.
State and local taxes also explore in most states. Some states tax interest income at the same rate as federal tax; others have lower rates or no income tax at all. Check your state's tax rules or speak with a tax professional to understand your full liability.
The difference between high-yield and traditional savings accounts
High-yield savings accounts currently offer interest rates between 4% and 5.35%, depending on the bank and current market conditions. Traditional savings accounts at large banks typically offer 0.01% to 0.05%. The difference in interest earned — and therefore in taxes owed — is substantial.
A $50,000 balance in a high-yield account earning 4.5% generates $2,250 in annual interest. The same balance in a traditional account earning 0.02% generates $10 in interest. The tax on $2,250 at a 22% bracket is roughly $495; the tax on $10 is roughly $2.20. Over time, the tax liability from high-yield accounts adds up significantly.
This does not mean high-yield accounts are a bad choice — the interest earned still exceeds the tax owed. But it is worth factoring the tax cost into your decision about where to keep your money, especially if you have large balances.
Reporting interest on your tax return
Interest income is reported on Schedule B (Interest and Ordinary Dividends) if you use the long form (Form 1040), or directly on Form 1040-SR if you are over 65. If your interest income is under $1,500 and you have no other investment income, you may be able to report it directly on the main 1040 form without filing Schedule B.
You list each 1099-INT separately by the name and address of the financial institution, then add them together for a total. The total goes on the appropriate line of your tax form. If you earned interest but did not receive a 1099-INT (which can happen if interest was under $10, or if there was an error), you still report it — the IRS expects you to track all interest earned.
If you file electronically, tax software typically imports 1099-INT data directly from the IRS, so you do not have to type it in manually. If you file by paper, you attach a copy of each 1099-INT to your return.
Interest earned on joint accounts and accounts for minors
If you hold a joint savings account, the interest is reported on a 1099-INT in the name and Social Security number of the person listed first on the account. That person is responsible for reporting the full interest amount on their tax return, unless you have a written agreement stating the interest should be split differently. If you split the interest, both people should keep documentation of that agreement in case the IRS asks.
If you open a savings account for a minor child, the interest is reported on the child's Social Security number. The child may be required to file their own tax return if the interest exceeds the standard deduction for dependents (which varies by year but is typically around $1,300 for 2024). Parents cannot claim the interest as their own income just because they manage the account.
Some parents use the "kiddie tax" rules to report a child's interest on the parents' return if the child is under 18 and has unearned income above a certain threshold. This is complex and varies by situation — consult a tax professional if you are setting up accounts for children.
Planning ahead to manage your tax bill
If you know you will earn significant interest income, you can set aside money throughout the year to cover the tax bill when it comes due. Divide your expected interest by your tax bracket to estimate what you will owe. For example, $2,000 in interest at a 24% bracket means roughly $480 in federal tax.
You can also consider spreading your savings across accounts in different tax years if you are near a tax bracket threshold. Moving money between accounts does not generate interest, so it does not create a tax event — only the interest earned is taxable. Some people also use tax-advantaged accounts like IRAs or 401(k)s to shelter savings from annual taxation, though those have contribution limits and withdrawal rules.
If you expect to owe more than $1,000 in taxes for the year, the IRS may require you to make quarterly estimated tax payments. This applies mainly to self-employed people, but it can also explore if you have significant investment income and do not have taxes withheld from a paycheck.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
The bank does not have to send you a 1099-INT if interest is under $10, but you still owe tax on it. Keep records of all interest earned and report it on your return. The IRS expects you to track income even when a 1099 is not issued.
What if I earned interest but did not get a 1099-INT?
Contact the bank and ask them to issue one. If they refuse or say the amount was too small, report the interest anyway on your tax return. Keep your own records — bank statements or year-end summaries — as proof of the amount earned.
Can I deduct savings account fees to offset the interest I earned?
No. Interest is reported as income, and account fees are not deductible for most people. You pay tax on the full interest amount, even if fees reduced your net gain. Some fees may be deductible if you are self-employed or managing investments as a business, but standard savings account fees are not.
Is interest from a money market account taxed differently?
No. Money market accounts are savings accounts, and the interest is taxed the same way as any other savings account interest — reported on Form 1099-INT and taxed as ordinary income at your marginal rate.
What if I moved money between my own accounts during the year?
Moving money between your own accounts does not create taxable income. Only the interest earned on the balance is taxable. Transfers, deposits, and withdrawals are not taxed events.