Interest on your savings account is taxable income

Any interest your bank pays you on a savings account counts as income to the IRS, and you owe federal income tax on it. Your bank will send you a form called a 1099-INT each January listing all the interest you earned the previous year. You report that amount on your tax return, and it gets taxed at your regular income tax rate — the same rate as your salary or wages.

The amount of tax you actually pay depends on how much interest you earned and what your total income was that year. Someone earning $30,000 a year will pay a lower percentage on that interest than someone earning $150,000. The IRS does not have a separate, lower tax rate for interest — it is treated like any other income.

Most savings accounts earn very little interest, so the tax bill is usually small. But it is still real income, and you still have to report it. Even if your bank does not send you a 1099-INT because the interest was under a certain threshold, you are still supposed to report it if you earned any at all.

Key Takeaways

  • Your bank sends you a 1099-INT form in January showing all interest earned in the previous year, and you must report this on your tax return.
  • Interest is taxed at your regular income tax rate, which depends on your total income for the year, not at a special lower rate.
  • Some states also tax savings account interest, so your total tax bill may be higher than federal tax alone.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means a larger tax bill, but the after-tax return is usually still better.

How the 1099-INT form works

In early January, your bank mails or emails you a 1099-INT — a tax form that lists the interest you earned in the previous calendar year. The form shows the total amount in Box 1. You receive one copy, and your bank sends a copy to the IRS as well. This is how the IRS knows you earned that income.

You do not have to do anything with the form except keep it and use the number when you file your taxes. If you use tax software, you can type the amount directly into the interest income field. If you file by hand or with a tax preparer, you give them the form or the number from it.

Banks are required to send a 1099-INT if you earned $10 or more in interest during the year. If you earned less than $10, your bank may not send one — but you are still supposed to report the interest on your return. Check your account statements if you did not receive a form but think you earned some interest.

Federal tax rates on interest income

Interest is added to your other income and taxed at whatever rate applies to your total. If you earned $35,000 in salary and $200 in interest, the IRS treats it as $35,200 in income. Your interest does not get its own separate tax bracket.

For 2024, federal tax brackets range from 10% at the lowest income level to 37% at the highest. Most people with savings accounts fall into the 12%, 22%, or 24% brackets. That means if you earned $100 in interest and you are in the 22% bracket, you would owe roughly $22 in federal tax on that interest (though the actual amount depends on your specific situation and deductions).

The exact amount you owe also depends on whether you take the standard deduction or itemize deductions, and whether you have other types of income or credits. This is why two people earning the same interest might owe different amounts of tax.

State income tax on savings interest

Most states also tax interest income. If your state has an income tax, you will owe state tax on your savings interest in addition to federal tax. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not have a state income tax at all, so residents of those states owe only federal tax.

State tax rates vary widely. Some states tax interest at the same rate as wages; others have a lower rate for investment income. New York, California, and Massachusetts all have different rules. You will report your interest income on your state tax return the same way you do on your federal return — using the 1099-INT your bank sent you.

If you live in a state with income tax and move to a state without one, or vice versa, your tax situation changes. This is worth thinking about if you are planning a move and have significant savings earning interest.

High-yield savings accounts and taxes

A high-yield savings account earns much more interest than a traditional savings account — sometimes 4% or 5% per year instead of 0.01%. This means you earn more money, but you also owe more tax on that money. The interest is still taxed at your regular income tax rate, not at a special rate.

Even so, a high-yield account is usually worth it. If you earn $500 in interest at 5% and owe 22% in federal tax, you pay $110 in tax and keep $390. That is still much better than earning $5 in interest at 0.01% and paying almost nothing in tax but also keeping almost nothing. The higher interest rate more than makes up for the higher tax bill.

The tax on interest from a high-yield account is reported the same way as interest from any other savings account — on the 1099-INT your bank sends you in January.

What happens if you do not report interest income

The IRS receives a copy of every 1099-INT your bank sends. If you do not report the interest on your tax return, the IRS will notice the mismatch between what you reported and what your bank reported. This can trigger a letter asking you to explain the difference, or in some cases, an audit.

Even small amounts of unreported interest can cause problems. It is not worth the risk. If you earned any interest at all, report it. The amount is usually small enough that it does not change your tax bill much, but reporting it keeps you in the clear with the IRS.

If you made a mistake in a previous year and did not report interest, you can file an amended return. It is better to correct it yourself than to wait for the IRS to contact you.

Interest from other accounts and investments

Interest from savings accounts is not the only kind of interest you might earn. Money market accounts, certificates of deposit (CDs), and some checking accounts also pay interest, and all of it is taxable. You will receive a 1099-INT for each account that earned $10 or more in interest, or sometimes a single form combining all your interest income from one bank.

Interest from bonds, bond funds, and some other investments is also reported on a 1099-INT. Dividends from stocks and mutual funds are reported on a different form called a 1099-DIV, but they are also taxable income. The key point is that any money your bank or investment company pays you for letting them use your money is income, and you have to report it.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

Your bank does not have to send you a 1099-INT if you earned less than $10, but you are still supposed to report the interest on your tax return. Check your account statements for the exact amount and include it when you file.

Can I deduct the taxes I pay on savings interest?

No. Interest income is taxable, and the tax you owe on it is not deductible. You cannot reduce your taxable income by the amount of tax you paid on interest.

What if my bank sent me a 1099-INT but I think the amount is wrong?

Contact your bank and ask them to review the calculation. If they made an error, they will send you a corrected form called a 1099-INT with "CORRECTED" marked on it. You then file the corrected form with your tax return.

Does interest from a savings account for my child count as their income?

Yes. If a savings account is in your child's name, the interest earned is their income, and they may need to file their own tax return depending on how much they earned. Some parents use this as a way to shift income to a child in a lower tax bracket, but there are rules about this called the "kiddie tax" that limit the benefit.

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

Yes. Interest from a CD is reported on a 1099-INT just like savings account interest, and it is taxed at your regular income tax rate. The only difference is that CDs usually earn more interest because you agree to leave the money there for a set period.