The IRS treats savings account interest as ordinary income
Interest you earn on a savings account is taxable income. The IRS does not distinguish between interest from a savings account, a money market account, or a certificate of deposit — all of it counts as income in the year you earn it, regardless of whether the bank actually pays it to you or adds it to your balance.
Your bank will report this interest to both you and the IRS on a Form 1099-INT if the amount exceeds $10 in a calendar year. You then report that interest on your federal tax return as income. The tax rate you pay depends on your overall income and tax bracket — there is no special lower rate for savings interest.
This applies even if you never withdraw the money. The moment the interest posts to your account, it becomes taxable income for that year.
Key Takeaways
- All savings account interest is reported to the IRS on Form 1099-INT when it exceeds $10 per year, and you must report it as income on your tax return.
- You owe tax on interest in the year it is earned, not in the year you withdraw it, even if the interest stays in your account.
- The tax you pay on savings interest is based on your regular income tax rate, which depends on your total income and filing status.
- Some accounts like Roth IRAs and certain education savings plans have tax-free interest, but regular savings accounts do not.
When the bank reports interest to the IRS
Your bank sends Form 1099-INT to the IRS and mails a copy to you by January 31 of the following year. This form shows all interest earned in the previous calendar year. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one.
The $10 threshold means that if you earn less than $10 in interest during the year, the bank does not have to issue a 1099-INT. However, you still owe tax on that interest if you have any tax liability at all — the reporting requirement and the tax obligation are separate things.
You should receive your 1099-INT even if the interest was automatically reinvested into your account rather than paid out. The form reflects what you earned, not what you withdrew.
How savings interest affects your tax bracket
Savings interest is added to your other income — wages, self-employment income, investment gains — to determine your total taxable income for the year. Depending on how much interest you earn and what your other income is, it can push you into a higher tax bracket.
For example, if you earn $50,000 in wages and $500 in savings interest, your taxable income is $50,500. That extra $500 is taxed at your marginal rate — the rate that applies to your highest dollars of income. If you are in the 22% federal bracket, you owe roughly $110 in federal tax on that interest (before any deductions or credits).
State and local income taxes also explore to savings interest in most states. A few states do not tax interest income, but most do. Check your state's rules if you are unsure.
Interest in tax-advantaged accounts versus regular savings
Interest earned inside a Roth IRA, traditional IRA, or 529 education savings plan is not when ready taxable. The tax treatment depends on the account type and when you withdraw the money, but the interest itself does not trigger a tax bill in the year it is earned.
A regular savings account at a bank has no such protection. Even a high-yield savings account — which pays more interest than a traditional account — still reports all interest as taxable income. The higher rate is the only difference; the tax obligation is the same.
If you are saving for a specific goal like education or retirement, moving money into a tax-advantaged account can reduce the tax you owe on the interest. This is one reason people use these accounts even when the interest rate is slightly lower than what a regular savings account offers.
What to do if you did not receive a 1099-INT
If you earned more than $10 in interest but did not receive a 1099-INT by early February, contact your bank directly. Ask them to issue a corrected form or provide you with the interest amount so you can report it yourself.
You are required to report all interest income even if the bank fails to send you a 1099-INT. The IRS has a copy of the form (or knows the bank should have sent one), so not reporting the interest can trigger a mismatch notice later. It is easier to report it when you file.
If you earned less than $10 in interest and did not receive a 1099-INT, you still report that interest on your tax return if you have any tax liability. Keep your bank statements as proof of the amount.
Interest from joint accounts and multiple accounts
If you own a savings account jointly with someone else, the interest is typically reported to both account owners on separate 1099-INT forms, split according to each person's ownership stake. You each report your share on your own tax return.
When you have multiple savings accounts — at different banks or even at the same bank — each one may generate its own 1099-INT. You report the interest from all of them on your tax return. The total is what matters for your tax liability, not the number of accounts.
If you moved money between accounts during the year, that does not create additional taxable events. Only the interest itself is taxable; moving your principal balance around is not.
How to report savings interest on your tax return
On the federal level, you report interest income on Schedule B (Interest and Ordinary Dividends) if your interest exceeds $1,500, or directly on Form 1040 if it is $1,500 or less. You list each 1099-INT you received and add up the total interest.
That total then goes to the income section of your Form 1040. From there, it flows into your adjusted gross income calculation, which determines your tax bracket and may be able to access for certain deductions and credits.
For state taxes, follow your state's rules. Most states have a similar process — you report interest income on a state return schedule — but some have different thresholds or rules for certain types of savers.
Frequently Asked Questions
Do I owe tax on savings interest if I do not withdraw it?
Yes. The IRS taxes interest in the year it is earned, whether or not you withdraw it. If interest posts to your account on December 31, you owe tax on it that year even if the money stays in the account for years.
What if my savings interest is very small, like $2?
You still owe tax on it if you have any tax liability. The bank does not have to report it on a 1099-INT (the threshold is $10), but you are required to report it yourself on your tax return. Keep your bank statements as documentation.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. Account fees are not deductible against interest income. However, if you have significant investment expenses, you may be able to deduct them in other contexts — consult a tax professional about your specific situation.
Is interest from a money market account taxed differently than a savings account?
No. Money market accounts, savings accounts, and CDs are all taxed the same way. The IRS treats all of them as interest income reported on Form 1099-INT. The account type does not matter; only the interest amount does.
What if I earned interest in a previous year but never reported it?
You should report it now if you have not already. The IRS may have a record of it from the 1099-INT the bank sent. Filing an amended return is better than waiting for the IRS to contact you, and it can reduce penalties if interest and taxes are owed.