Yes, the interest your savings account earns is taxable income

The money you deposit into a savings account is not taxable — that is your own money. But the interest the bank pays you on that balance is taxable income to the IRS and to your state, if your state has an income tax. You owe tax on that interest in the year you earn it, whether or not you withdraw the money.

How much tax you pay depends on your total income for the year and your tax bracket. A savings account earning $50 in interest looks different to the IRS depending on whether your total income is $30,000 or $300,000. The interest itself is reported to you and to the IRS on a Form 1099-INT, which the bank sends in January of the following year.

Most people do not owe federal tax on savings interest unless their total income crosses a certain threshold, but the interest still counts toward that threshold. State tax rules vary — some states tax all interest income, others tax none, and some have thresholds of their own.

Key Takeaways

  • Interest earned on a savings account is taxable income in the year you earn it, even if you do not withdraw it.
  • Banks report savings interest to the IRS on Form 1099-INT, which arrives in January and shows the prior year's earnings.
  • You only owe federal tax on savings interest if your total income for the year exceeds the standard deduction for your filing status.
  • State income tax on savings interest varies by state — some states do not tax it at all, while others tax all interest income.
  • Interest rates on savings accounts are low enough that most people earn less than $10 in annual interest, which often falls below reporting thresholds.

When you actually owe federal tax on savings interest

The IRS does not tax savings interest unless your total income for the year is above the standard deduction for your filing status. For 2024, the standard deduction is $14,600 for a single filer and $29,200 for married filing jointly. If your income (including the savings interest) stays below that number, you owe no federal income tax.

If your income does exceed the standard deduction, you owe tax on the interest at your ordinary income tax rate — the same rate that applies to wages or salary. That rate depends on your tax bracket, which is determined by your total income. Someone in the 12 percent bracket pays 12 cents in federal tax for every dollar of interest earned. Someone in the 22 percent bracket pays 22 cents.

There is a separate rule for unearned income if you are a dependent or a minor. If you are claimed as a dependent on someone else's return and your unearned income (interest, dividends, capital gains) exceeds $1,300 in 2024, the excess is taxed at your parent's rate rather than your own. This rule rarely affects savings accounts because the interest is so small, but it matters if you have other investments.

How banks report your interest to the IRS

In January, your bank sends you a Form 1099-INT showing all the interest you earned in the previous calendar year. The form goes to you and a copy goes to the IRS. You use the amount on the form to report the interest on your tax return, either on Schedule 1 (Form 1040) if you file a full return, or on Form 1040-SR if you are 65 or older.

Banks are required to issue a 1099-INT if you earned $10 or more in interest during the year. If you earned less than $10, the bank may not send a form, but you still owe tax on the interest if your total income is above the standard deduction. Keep your own records of interest earned if the bank does not report it.

The 1099-INT shows interest only — it does not show deposits, withdrawals, or the principal balance. It is a record of earnings, not account activity. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one.

State income tax on savings interest

State tax treatment of savings interest varies widely. Some states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not have a state income tax at all, so you owe no state tax on savings interest. Other states tax all interest income the same way the federal government does, using the standard deduction and tax brackets specific to that state.

A few states have special rules. Illinois, for example, does not tax interest income at all, even though it has a state income tax on wages. Mississippi taxes interest but allows a deduction for some types of interest income. New York taxes interest but has a lower threshold than the federal standard deduction for reporting requirements.

If you live in a state with income tax, you will report your savings interest on your state return using the same 1099-INT your bank sent you. The state will calculate tax based on its own brackets and rules. If you moved during the year, you may owe tax to two states — check your state's rules on part-year residents.

How to report savings interest on your tax return

If you file a federal tax return, you report savings interest on Schedule 1 (Form 1040), line 8b, labeled "Interest." Add up all the interest from all your 1099-INT forms and enter the total. If your only income is savings interest and it is below the standard deduction, you may not need to file a return at all — but check your state's rules, because some states have lower thresholds.

The interest is added to your other income to determine your total income for the year. That total is what determines your tax bracket and whether you owe tax. If your total income is below the standard deduction, you owe no federal tax even if you report the interest.

If you use tax software or work with a tax preparer, you will enter the amount from the 1099-INT when prompted for interest income. The software or preparer will handle the rest — calculating whether you owe tax, at what rate, and where to report it on your return.

Strategies to minimize tax on savings interest

Because current savings account interest rates are low — typically between 4 and 5 percent annually — most people earn very little interest. A $10,000 balance earning 4.5 percent generates $450 in annual interest, which is taxable but usually does not push someone into a higher tax bracket.

If you are trying to reduce taxable interest income, the most straightforward approach is to keep money in a high-yield savings account rather than a regular savings account. High-yield accounts pay more interest, but the interest is still taxable. The tax benefit comes from the fact that you earn more on the same balance, so the after-tax return is higher even though the tax bill is larger.

Some people use tax-advantaged accounts to shelter savings from tax. A Roth IRA or Roth 401(k) allows you to earn interest and other investment income tax-free, but you can only contribute a limited amount each year and you cannot withdraw the money before age 59½ without penalties. A 529 college savings plan offers tax-free growth if the money is used for education. These are not tax avoidance strategies — they are legitimate accounts designed for specific purposes — but they do reduce your tax bill if you are saving for those goals.

What happens if you do not report savings interest

The IRS receives a copy of every 1099-INT your bank sends you. If you do not report the interest on your return and your total income is above the standard deduction, the IRS will likely catch the discrepancy during processing. The agency may send you a notice asking for the missing income and calculating the tax owed, plus interest and penalties.

The penalty for not reporting income is usually 20 percent of the underpaid tax, plus interest that accrues from the original due date. If the IRS determines the omission was fraudulent rather than accidental, the penalty can be as high as 75 percent. For most people with small amounts of savings interest, the IRS focuses on larger discrepancies, but the risk exists.

If you realize you missed reporting interest in a prior year, you can file an amended return using Form 1040-X. Filing an amendment voluntarily before the IRS contacts you may reduce or eliminate penalties, depending on the circumstances and how long ago the return was filed.

Frequently Asked Questions

Do I have to file a tax return if my only income is savings interest?

Only if your interest income exceeds the standard deduction for your filing status. For 2024, that is $14,600 for a single filer. If your interest is below that, you do not owe federal tax and do not have to file. However, check your state's rules — some states have lower thresholds or different rules for part-year residents.

What if I earned less than $10 in interest — do I still owe tax?

Yes, if your total income is above the standard deduction. The $10 threshold is only for banks to issue a 1099-INT form. You still owe tax on interest below $10 if you are required to file. Keep your own records of small interest amounts.

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

No. You report the full interest amount shown on the 1099-INT. Fees are not deductible against interest income. However, if a bank charges you a fee that exceeds the interest you earned, you can sometimes negotiate with the bank or switch to an account with no fees.

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

Not automatically. The bank reports the full interest amount to the IRS under the Social Security number of the account owner listed first on the account. If the account is truly owned jointly and the interest should be split, you and the other owner need to file amended returns or work with a tax preparer to report the correct split. The bank's 1099-INT is not always accurate for joint accounts.

Do I owe tax on interest if I move to a state with no income tax?

You owe federal tax on savings interest regardless of where you live. You do not owe state income tax if you move to a state with no income tax, but you still owe federal tax. If you moved during the year, you may owe tax to your old state for the part of the year you lived there — check that state's rules on part-year residents.