Interest on savings accounts is taxable income

The interest your bank pays you on a savings account counts as income to the IRS. You owe federal income tax on it at your ordinary tax rate — the same rate you pay on wages or salary. Your bank will send you a form called a 1099-INT each January showing how much interest you earned the previous year, and you report that amount on your tax return.

The amount of tax you actually owe depends on your total income and which tax bracket you fall into. Someone earning $30,000 a year pays a lower percentage on that interest than someone earning $150,000. But either way, the interest itself is not tax-free.

State and local income tax may also explore to your interest, depending on where you live. A few states do not tax interest income at all, but most do. The tax rate varies by state and by your income level within that state.

Key Takeaways

  • Interest earned on a savings account is taxable as ordinary income at your federal tax rate.
  • Your bank reports the interest on Form 1099-INT, which you receive by January 31 and must report on your tax return.
  • You owe tax on interest even if you do not withdraw the money — the tax is due when the interest is credited to your account.
  • Most states also tax savings account interest, though a handful do not; check your state's rules or ask your tax preparer.
  • High-yield savings accounts earn more interest, which means you owe more tax, but the after-tax return is usually still higher than a traditional savings account.

How the IRS knows about your interest

Banks are required to report interest payments to the IRS on your behalf. If you earned $10 or more in interest during the calendar year, your bank will mail you a 1099-INT form by January 31. The form shows your name, Social Security number, the bank's name, and the total interest paid.

The bank sends a copy to the IRS at the same time. This means the IRS already knows how much interest you earned before you file your tax return. If you do not report the interest on your return, the IRS will notice the discrepancy and may send you a notice or bill.

Even if you earned less than $10 in interest and did not receive a 1099-INT, you are still required to report that interest on your tax return if you file one. The threshold for receiving the form is not the same as the threshold for owing tax.

When you owe tax on interest you have not withdrawn

You owe income tax on interest the moment it is credited to your account, not when you withdraw it. This is called the accrual method of accounting. If your savings account earned $500 in interest during 2024 but you never touched that money, you still owe tax on the $500 in the 2024 tax year.

This matters most if you are saving for a specific goal and plan to leave the interest untouched. The tax is still your responsibility. You may need to pay it from other money you have, or claim it as a deduction if your overall tax situation allows.

Federal tax brackets and how much you actually pay

The percentage of tax you owe on interest depends on your total income and your filing status. The IRS uses tax brackets — income ranges that correspond to different tax rates. In 2024, federal tax rates range from 10% to 37%, depending on how much you earn.

If you are single and earned $47,025 in wages, and your savings account paid you $500 in interest, that $500 is taxed at your marginal rate — the rate that applies to your highest income. For a single filer in that income range, the marginal rate is 22%. So you would owe roughly $110 in federal tax on that $500 in interest.

Someone earning $20,000 in wages would owe less — roughly $55 on the same $500 in interest — because their marginal rate is 12%. The brackets change each year, so the exact amount varies. A tax preparer or tax software can calculate your specific liability.

State and local taxes on savings interest

Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. State rates vary widely. Some states have no income tax at all and therefore do not tax interest. Others tax interest at rates ranging from 1% to over 13%, depending on your income.

A handful of states — including Illinois, Mississippi, and Tennessee — do not tax interest and dividend income, even though they tax wages. If you live in one of these states, you owe federal tax on your savings interest but not state tax.

A few cities also impose local income tax. New York City, for example, taxes interest income at rates up to 3.876%. If you live in a city with local income tax, that amount is added on top of your state and federal liability.

How high-yield savings accounts change your tax picture

A high-yield savings account earns significantly more interest than a traditional savings account — sometimes 4% to 5% annually, compared to 0.01% or less at many large banks. The tradeoff is that you owe more tax on the higher interest.

If you earn $2,000 in interest from a high-yield account instead of $50 from a traditional account, you owe tax on $2,000 instead of $50. At a 22% federal rate, that is roughly $440 more in federal tax. But your after-tax return is still usually much higher with a high-yield account, because the interest earned is so much greater.

The decision to use a high-yield account should not be driven by tax avoidance — the tax is a cost of earning more interest, and earning more interest is usually worth it. But it is worth understanding that your tax bill will be higher.

Reporting interest on your tax return

When you file your federal tax return, you report interest income on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in total interest and dividends. If you have less than that, you can report the interest directly on your Form 1040.

You will need the 1099-INT your bank sent you, or a statement showing the interest earned if the bank did not issue a form. Most tax software walks you through entering this information. If you use a tax preparer, bring the 1099-INT with you.

For state taxes, the process varies by state. Some states use the same federal figure; others have their own forms. Your state tax return instructions will specify where to report interest income.

Frequently Asked Questions

Do I owe tax on interest if I do not withdraw the money?

Yes. The IRS taxes interest when it is credited to your account, not when you withdraw it. If your account earned $300 in interest during the year, you owe tax on $300 even if the money stayed in the account the entire time.

What if my bank did not send me a 1099-INT?

If you earned less than $10 in interest, your bank is not required to send a form. But you still owe tax on that interest if you file a return. Check your account statements for the interest earned and report it on your return. If you earned $10 or more and did not receive a form by February 1, contact your bank.

Can I deduct savings account interest as a business expense?

No. Interest earned on a personal savings account is not deductible. It is taxable income, not an expense. Interest you pay on a loan or credit card may be deductible in limited situations, but interest you earn is always taxable.

Are money market accounts or CDs taxed differently than savings accounts?

No. Money market accounts, certificates of deposit (CDs), and other deposit accounts all report interest on a 1099-INT and are taxed the same way as a regular savings account. The interest is ordinary income taxed at your marginal rate.

What if I earned interest in multiple banks?

Each bank will send you a separate 1099-INT if you earned $10 or more at that bank. You report the interest from all banks on your tax return. The total interest from all sources is added together and taxed as one amount.