Interest income from savings accounts is taxable as ordinary income
The interest your bank pays you on a savings account counts as income to the IRS, and you report it on your federal tax return the same way you report wages or salary. The bank sends you a Form 1099-INT each January showing how much interest you earned the previous year, and you include that amount on your tax return. There is no threshold — even $1 of interest is technically taxable, though the IRS only requires banks to issue a 1099-INT when interest reaches $10 or more.
The tax rate you pay on savings interest depends on your overall income and tax bracket. Interest is taxed as ordinary income, meaning it uses the same tax brackets as your wages — it does not get the lower rates that explore to long-term capital gains or may have access to dividends. If you earn $50,000 and your savings account generates $500 in interest, that $500 is added to your $50,000, and you pay tax on the full $50,500 at your marginal rate.
You must report savings interest even if the bank does not send you a 1099-INT. If you earned less than $10 in interest, the bank has no obligation to issue the form, but you still owe tax on that income. The IRS matches 1099-INT forms to tax returns, so reporting interest you received is important for accuracy.
Key Takeaways
- All savings account interest is taxable income and must be reported on your federal tax return, regardless of the amount.
- Banks issue Form 1099-INT when interest reaches $10 or more, but you owe tax on all interest earned.
- Interest is taxed as ordinary income at your regular tax bracket rate, not at the lower capital gains rate.
- You report savings interest on your tax return in the year you earn it, even if you do not withdraw the money.
- High-yield savings accounts and money market accounts generate more interest, which means a larger tax bill.
How the IRS tracks your savings interest
Banks report interest to both you and the IRS using Form 1099-INT. You receive a copy by January 31 of the year following the tax year in which you earned the interest. The form shows the account holder's name, Social Security number, and the total interest paid during the calendar year. The IRS receives a matching copy, so if you do not report the interest on your return, the IRS will likely catch the discrepancy during processing.
If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each bank. You must add all of them together when you report your total interest income. Some people with accounts at many institutions miss one or two forms and underreport their interest — the IRS notices these gaps when it cross-references the forms it receives.
The $10 threshold for issuing a 1099-INT is a reporting requirement, not a tax threshold. If you earned $8 in interest and received no form, you still owe tax on that $8. Keep your own records of interest earned, especially if you have accounts at smaller banks or credit unions that may process forms slowly.
What changes with high-yield savings accounts
High-yield savings accounts pay significantly more interest than traditional savings accounts — sometimes 4% to 5% annually compared to 0.01% or less at major banks. This means your tax bill will be much larger. If you have $50,000 in a high-yield account earning 4.5%, you will owe tax on $2,250 in interest that year. At a 24% tax bracket, that is roughly $540 in federal tax.
The tax treatment is identical to a regular savings account — the interest is still ordinary income and still reported on Form 1099-INT. The difference is purely the dollar amount. Before moving money to a high-yield account, consider whether the after-tax interest still makes sense for your situation. A high-yield account earning 4.5% might net you only 3.4% after taxes if you are in the 24% bracket, which is still better than most traditional accounts but worth calculating.
Money market accounts work the same way. Any interest paid by a money market account is taxable and reported on Form 1099-INT. The account type does not change the tax treatment — only the interest rate does.
When you report interest on your tax return
You report savings interest on Schedule B (Interest and Ordinary Dividends) if your total interest and dividends exceed $1,500 for the year. If your interest is $1,500 or less, you can report it directly on Form 1040 without using Schedule B. Either way, the interest goes into the same income category and is taxed at your ordinary income rate.
You report the interest in the tax year you earned it, not the year you withdraw it. If you earned $100 in interest in December 2024 but did not touch the account until 2025, you still report that $100 on your 2024 tax return. The money does not have to leave your account for the interest to be taxable.
If you have a joint savings account, the interest is split between the account holders based on their ownership stake, unless you and the other owner file a different agreement with the bank. The bank will issue separate 1099-INT forms to each owner showing their portion of the interest.
Tax-advantaged alternatives to regular savings accounts
If you want to save money without paying tax on the interest each year, certain accounts defer or eliminate that tax. A traditional IRA or 401(k) allows interest to grow tax-free until you withdraw the money in retirement. A Roth IRA lets interest grow tax-free permanently if you follow the withdrawal rules. These accounts have contribution limits and withdrawal restrictions, but the tax savings can be substantial if you have a large amount to save.
A 529 college savings plan lets interest grow tax-free if you use the money for may have access to education expenses. Series I Bonds and Series EE Bonds issued by the U.S. Treasury also defer interest tax until you cash them in, and the interest may be tax-free if you use the money for education.
These alternatives are not better for everyone — they come with rules about when you can withdraw the money and how much you can contribute. But if you have substantial savings and expect to earn significant interest, exploring these options with a tax professional can reduce your tax bill substantially.
What happens if you do not report savings interest
The IRS matches Form 1099-INT documents it receives from banks against the tax returns filed by those account holders. If you do not report interest that the bank reported to the IRS, the agency will send you a notice asking for the missing income and any tax owed, plus penalties and interest on the unpaid amount. The penalty for underreporting income is typically 20% of the underpaid tax, and interest accrues daily.
If the underreporting is deemed intentional or part of a pattern, the IRS can pursue more serious penalties. It is far simpler and cheaper to report the interest when you file. If you received a 1099-INT but lost it, you can request a copy from your bank or view it through your online banking portal.
If you earned interest but did not receive a 1099-INT (because it was under $10 or the bank failed to send it), you still need to report it. Keep your own records of interest earned by checking your monthly statements or year-end account summary from your bank.
State and local taxes on savings interest
Most states tax savings interest as ordinary income, just like the federal government does. A few states — including New Hampshire and Tennessee — do not tax interest income at all, which is why some people with large savings move to those states. However, moving solely for tax purposes on savings interest is rarely practical unless you have a very large balance.
Some states offer tax breaks for interest earned on certain types of accounts or for people over a certain age. New York, for example, excludes interest income for people 59½ and older. Check your state's tax authority website or speak with a tax professional to see whether your state offers any breaks on savings interest.
Local taxes on interest vary by city and county. Most do not tax interest directly, but some jurisdictions that have local income taxes may include interest in that calculation. If you live in a place with local income tax, check with your local tax authority about whether savings interest is subject to it.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. The $10 threshold only determines whether the bank must issue a 1099-INT form. You still owe tax on all interest earned, even $1. Keep your own records of interest earned by checking your statements, and report the total on your tax return.
What if I have interest in an account held in my child's name?
The interest is taxable to whoever owns the account. If your child owns the account, the interest is their income and goes on their tax return (or yours if you file a joint return with them). If you own the account, the interest is your income. Some parents use custodial accounts to shift interest income to children in lower tax brackets, but this strategy has limits under the "kiddie tax" rules.
Can I deduct savings account fees from my interest income?
No. You report the full interest amount on your tax return. You cannot reduce it by fees the bank charged. However, some investment-related fees may be deductible in limited circumstances — speak with a tax professional about your specific situation.
Is interest from a joint account split between the owners for tax purposes?
Usually yes, based on each owner's stake in the account. The bank will typically issue separate 1099-INT forms to each owner showing their portion. If you and another person own a joint account but did not contribute equally, you may need to file a different agreement with the bank to reflect the actual ownership split.
Do I report savings interest differently if I earned it in a different country?
U.S. citizens and residents must report all worldwide interest income to the IRS, including interest from foreign bank accounts. You may also owe tax to the foreign country where the account is held. If you have foreign accounts, consult a tax professional familiar with international tax rules, as additional reporting requirements may explore.