Savings account interest is taxable income

The interest your bank pays you on a savings account is income, and you owe federal income tax on it. Your bank will report this interest to the IRS on a form called a 1099-INT, and you report it on your tax return. The amount of tax you pay depends on how much interest you earned and your overall income for the year.

This applies to all savings accounts — whether it's a regular savings account, a high-yield savings account, or a money market account. The higher the interest rate, the more interest you earn, and the more tax you owe. Some states also tax savings account interest, though most do not.

Key Takeaways

  • Your bank reports all savings account interest to the IRS on a 1099-INT form, which you must include on your tax return.
  • The tax you owe on interest depends on your tax bracket — the same interest amount costs different people different amounts in taxes.
  • You only receive a 1099-INT if you earned $10 or more in interest during the year, but you still owe tax on smaller amounts.
  • Some states do not tax savings account interest, while others do — check your state's rules if you live outside the major non-taxing states.

How the IRS knows about your interest

Banks are required to send a 1099-INT to both you and the IRS if you earned $10 or more in interest during the calendar year. You will receive this form by January 31 of the following year. The form shows the exact amount of interest the bank paid you.

Even if you earned less than $10 in interest, you still owe tax on it — the bank just does not have to send you a 1099-INT. You are responsible for reporting it yourself. The IRS matches the 1099-INT forms it receives from banks against the tax returns people file, so underreporting interest is likely to trigger a notice.

What tax bracket means for your interest

The tax you pay on interest is not a flat percentage. Instead, it depends on your tax bracket — the range of income that determines what percentage of your income goes to federal taxes. If you earn $50,000 a year, an extra $500 in interest might be taxed at 12%. If you earn $200,000, that same $500 might be taxed at 24%.

This is why two people with the same savings account interest can owe very different amounts in tax. Your tax bracket is determined by your total income for the year — wages, self-employment income, interest, dividends, and other sources all add together.

State taxes on savings interest

Most states do not tax interest income at all. However, some states do. If you live in a state with an income tax, check your state's tax website or ask a tax preparer whether savings account interest is taxed in your state.

A few states have no income tax at all — these include Texas, Florida, Tennessee, and Wyoming. If you live in one of these states, you only owe federal tax on your interest, not state tax. If you live in a state with income tax, the amount varies by state and by how much interest you earned.

When you might owe estimated taxes

If you earn a large amount of interest — usually $1,000 or more in a year — you might owe estimated taxes. This means you pay the IRS in quarterly installments rather than waiting until tax time. This applies mainly to people with significant investment income or self-employment income, not to most people with a regular savings account.

Your tax preparer or the IRS website can tell you whether you need to pay estimated taxes based on your specific situation. Most people with a single savings account do not need to worry about this.

How to report interest on your tax return

When you file your federal tax return, you report your interest income on a form called Schedule B (if you have other investment income) or directly on your main tax form (Form 1040) if interest is your only investment income. You list the name of the bank, the amount from the 1099-INT, and add it to your other income.

If you use tax software, it will usually walk you through entering this information. If you use a tax preparer, bring your 1099-INT forms with you. The software or preparer will calculate how much tax you owe based on your total income and tax bracket.

Interest from joint accounts and accounts for children

If you have a joint savings account with someone else, the interest is split between you based on who owns what portion of the account. Each person reports their share on their own tax return. The bank may send two 1099-INT forms, one to each owner, or one form that you split — check with your bank about how they handle it.

If you open a savings account for a child, the interest is the child's income, not yours. However, children have their own tax brackets and standard deductions. A child with very little interest income may not owe any tax at all. A parent or guardian reports the child's interest on the child's tax return, not their own.

Frequently Asked Questions

Do I have to pay taxes on interest if I earned less than $10?

Yes. The $10 threshold only determines whether the bank sends you a 1099-INT form. You still owe tax on any interest you earned, no matter how small. You report it yourself on your tax return.

Can I deduct savings account interest as a loss?

No. Interest income cannot be deducted. However, if you paid interest on a loan (such as a mortgage or student loan), that interest may be deductible — that is a different situation and depends on the type of loan.

What if my bank did not send me a 1099-INT but I earned interest?

Contact your bank and ask them to send you one. If they confirm you earned less than $10, you still report the interest on your tax return yourself. Keep your bank statements as proof of the amount.

Does high-yield savings interest get taxed differently?

No. High-yield savings accounts pay more interest, so you earn more taxable income, but the tax treatment is identical to a regular savings account. The interest is reported on a 1099-INT and taxed as ordinary income.

What if I moved my money between banks during the year?

Each bank reports only the interest it paid you while you held money there. You may receive multiple 1099-INT forms from different banks. Add all of them together when you report your total interest income on your tax return.