Savings accounts are not tax-free, but the tax you owe depends on how much interest you earn

The money you put into a savings account is yours and stays yours—no tax on that. But the interest the bank pays you is income, and the IRS taxes it. How much you owe depends on the interest rate, how long your money sits there, and your overall income that year. A savings account earning 0.01% on $1,000 generates so little interest that you may owe nothing. One earning 4.5% on $50,000 generates interest you will definitely report.

The bank reports this interest to you and to the IRS on a 1099-INT form each January. You then report it on your tax return. There is no way around it and no special savings account that avoids this—the tax applies to all savings accounts, money market accounts, and certificates of deposit.

Key Takeaways

  • Interest earned in a savings account is taxable income and must be reported to the IRS on your tax return.
  • Banks send you a 1099-INT form by January 31 showing how much interest you earned the previous year.
  • You only owe tax on the interest itself, not on the original money you deposited.
  • The amount of tax you owe depends on your total income for the year and your tax bracket, not on the bank or account type.
  • Some accounts like Roth IRAs and 529 plans have different tax rules, but regular savings accounts always tax the interest.

When the bank reports your interest to the IRS

Every January 31, your bank sends you a 1099-INT form if you earned $10 or more in interest during the previous year. This form shows exactly how much interest you earned. The bank also sends a copy to the IRS, so the IRS already knows about your interest before you file your return.

You report this interest on your tax return, usually on Schedule 1 (Form 1040) or directly on the 1040 itself, depending on your filing situation. If you earned interest from multiple banks, you add all of it together and report the total. The IRS matches what you report against what the banks reported, so underreporting or omitting it creates a mismatch they will catch.

How much tax you actually owe on the interest

The tax rate on savings interest is not a flat percentage. Instead, interest is taxed as ordinary income at whatever rate applies to your tax bracket. If you are in the 12% federal tax bracket, interest is taxed at 12%. If you are in the 22% bracket, it is taxed at 22%. Your tax bracket depends on your total income for the year—wages, self-employment income, investment gains, and interest all add together.

Example: You earn $50,000 in wages and $500 in savings interest. Your taxable income is $50,500. That extra $500 pushes you into a higher bracket or sits within your current bracket, and you owe tax on it at your marginal rate. If that rate is 12%, you owe $60 in federal tax on the interest. State income tax may explore on top of that, depending on where you live.

Some states do not tax interest income at all—New Hampshire and Tennessee, for instance, do not tax interest or dividends. If you live in one of those states, you owe federal tax but not state tax. Most other states tax interest the same way the federal government does.

The difference between regular accounts and tax-advantaged accounts

A regular savings account at a bank or credit union always taxes the interest. But certain accounts created specifically for saving have different rules. A Roth IRA lets interest and investment gains grow tax-free, and you do not owe tax when you withdraw the money in retirement (as long as you follow the rules). A 529 college savings plan also grows tax-free if you use the money for education expenses.

These accounts have contribution limits and withdrawal rules that make them less flexible than a regular savings account. A Roth IRA has an annual contribution limit (currently $7,000 for most people) and you cannot withdraw the earnings before age 59½ without penalty. A 529 plan is tied to education expenses. For money you want to keep accessible and flexible, a regular savings account is simpler—you just pay tax on the interest.

What happens if you earn very little interest

If your savings account earns less than $10 in interest during a year, the bank does not send you a 1099-INT form. You still technically owe tax on that interest, but the amount is so small that it rarely matters for most people's returns. The IRS does not expect you to report interest below $10.

However, if you have multiple accounts at different banks and the total interest across all of them is $10 or more, each bank that paid you $10 or more will send a 1099-INT. You report all of it. The threshold is per bank, not per person.

How to reduce the tax on savings interest

You cannot avoid the tax, but you can reduce the interest you earn and therefore the tax owed. This sounds backwards, but it matters in specific situations. If you are in a very high tax bracket and have a large sum sitting in a low-interest savings account, moving some of that money into a tax-advantaged account like a Roth IRA (if you are under the income limit) or a 529 plan (if you have education expenses coming) shields the growth from tax.

Another approach is to keep only the money you need for emergencies in a savings account and invest the rest in a taxable brokerage account, where you have more control over when you realize gains and losses. This is a longer-term strategy and involves investment risk, so it is not right for everyone.

For most people, the simplest approach is to accept that savings interest is taxable income and factor that into your planning. If you earn $500 in interest and you are in the 22% bracket, you will owe roughly $110 in federal tax on it. That is the cost of having your money earn something rather than sitting in a non-interest-bearing account.

Frequently Asked Questions

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

The bank does not send you a 1099-INT form if you earn less than $10 in interest. Technically you still owe tax on it, but the IRS does not expect you to report amounts below that threshold. If you have multiple accounts and the total is $10 or more, report the total.

What if I earned interest but did not get a 1099-INT form?

Contact the bank and ask for the form. It should arrive by January 31. If the bank cannot locate it, ask for a written statement showing the interest earned. You still report the interest on your return even if the form is late.

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

No. You report the full interest amount on your return. Fees are not deductible against interest income. However, if a bank charges you a fee that exceeds the interest you earned, you still report the interest as income—you cannot report a negative number.

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

Yes. Money market accounts, savings accounts, and certificates of deposit all earn interest that is taxed as ordinary income. The bank reports it on a 1099-INT form the same way.

What if I move money between savings accounts—do I owe tax on that?

No. Moving your own money from one account to another is not a taxable event. You only owe tax on the interest the money earns, not on transfers between your own accounts.