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 taxable income in the year you earn it, regardless of whether the bank paid it to you in cash or added it to your balance.

Your bank reports this interest to both you and the IRS on a Form 1099-INT each January. The threshold for receiving a 1099-INT varies by bank, but many institutions issue one if you earned $10 or more in interest during the year. Even if your bank does not send you a 1099-INT, you still owe tax on the interest — the form is just documentation.

The tax rate you pay depends on your overall income and tax bracket. Interest is added to your other income (wages, self-employment, investment gains) and taxed at your marginal rate, which could be 10%, 12%, 22%, 24%, 32%, 35%, or 37% for federal tax, plus any state and local income tax that applies where you live.

Key Takeaways

  • All interest earned on savings accounts is reported to the IRS on Form 1099-INT and must be reported on your tax return.
  • You owe federal income tax on savings interest at your marginal tax rate, plus any state or local income tax.
  • Interest is taxed in the year you earn it, even if the bank leaves the money in your account rather than paying it out.
  • Banks typically issue a 1099-INT if you earned $10 or more in interest, but you must report all interest regardless of whether you receive the form.

How the 1099-INT form works

In late January or early February, your bank sends you a Form 1099-INT showing the total interest you earned during the previous calendar year. This form goes to you and to the IRS at the same time. The form lists the account number, the bank's name and tax ID, and the amount of interest in Box 1 (labeled "Interest Income").

If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. You then add all the interest amounts together when you report your income on your tax return — either on Schedule 1 (Form 1040) if you file a standard return, or on the appropriate line of your state return if you file state taxes.

Some banks do not issue a 1099-INT if interest falls below their reporting threshold, often $10. However, you are still required to report that interest on your return. Keep your monthly statements or year-end interest summary from your bank so you can verify the total if you need to.

When interest is taxed versus when you receive it

The IRS taxes interest in the year you earn it, not the year you withdraw it or the year the bank pays it out. If your savings account earns $50 in interest during 2024, you owe tax on that $50 in 2024, even if the bank does not pay it to you until January 2025 or leaves it sitting in the account.

This matters most with certificates of deposit (CDs) and some promotional savings accounts that compound interest monthly or quarterly. The interest accrues and becomes taxable as it is earned, even though you cannot touch the money until the CD matures or the promotional period ends.

State and local taxes on savings interest

Most states tax savings account interest as ordinary income at their state income tax rate. A handful of states — including Pennsylvania, New Hampshire, Tennessee, and Wyoming — do not tax interest income at all, which can make a meaningful difference if you live there and earn significant interest.

Some states offer partial exemptions for interest earned by people over a certain age (often 65 or older), though the rules vary widely. A few states tax interest at a flat rate rather than explore it to your regular tax bracket. Check your state's tax authority website or ask a tax preparer about the rules in your state.

If you live in a city or county that levies a local income tax (common in Ohio, Pennsylvania, and parts of other states), that tax may also explore to your savings interest. The amount is usually small, but it adds up if you have a high-yield savings account earning several hundred dollars per year.

How much interest triggers a tax obligation

There is no minimum threshold for owing tax on savings interest. If you earn $1 in interest, you technically owe tax on it. However, banks only issue a 1099-INT when interest reaches their reporting threshold, which is often $10 but varies by institution.

The absence of a 1099-INT does not mean you do not owe tax. If your interest falls below the reporting threshold, you still must report it on your return if you file one. The IRS matches 1099-INT forms to tax returns, so if you report interest that does not appear on a 1099-INT, that is normal and expected.

If you have very little income and your interest is your only income source, you may not owe federal tax at all because your interest falls below the standard deduction for your filing status. But you still report the interest on your return — you just do not owe tax on it.

Strategies that do not reduce the tax on savings interest

You cannot avoid tax on savings interest by keeping the account in someone else's name, by not withdrawing the money, or by moving it to a different bank. The person whose Social Security number is on the account (the account owner) is responsible for reporting and paying tax on the interest, regardless of who deposited the money or who has access to it.

If you hold a savings account jointly with another person, the interest is split between you based on each person's ownership stake, and each of you reports your share on your own return. The bank may issue separate 1099-INT forms to each owner, or one form to the primary account holder — check with your bank about how they handle joint accounts.

Putting money in a savings account for a minor child does not reduce your tax obligation if you own the account. The child may have a lower tax rate and could owe less tax on the interest, but only if the account is in the child's name and the child files their own return. This is sometimes called the "kiddie tax" rule, and it has specific income thresholds and age limits.

Frequently Asked Questions

Do I have to report savings interest if I did not receive a 1099-INT?

Yes. If your bank did not send you a 1099-INT because interest fell below their reporting threshold, you still must report all interest you earned on your tax return. Keep your statements as proof of the amount.

What if I earned interest in a savings account but the bank went out of business?

You still owe tax on the interest you earned before the bank closed. If you cannot obtain a 1099-INT from the failed bank, use your statements or account records to calculate the interest and report it on your return. The IRS understands that documentation may be incomplete in these situations.

Can I deduct savings account fees from the interest I report?

No. You report the gross interest the bank paid or credited to your account. Fees are not deductible against interest income for most taxpayers. However, if you itemize deductions and the fees may have access to as miscellaneous investment expenses, you may be able to deduct them — consult a tax preparer about your specific situation.

Is interest from a high-yield savings account taxed differently?

No. High-yield savings accounts earn more interest, which means you owe tax on a larger amount, but the tax treatment is identical to a regular savings account. The interest is reported on a 1099-INT and taxed as ordinary income at your marginal rate.

What happens if I do not report savings interest on my tax return?

The IRS receives a copy of your 1099-INT and matches it to your return. If you do not report the interest, the IRS will likely send you a notice of underreported income and bill you for the tax owed plus penalties and interest. It is far simpler to report the interest when you file.