The money you deposit is not taxable, but the interest your bank pays you is

The dollars you put into a savings account are yours—no tax on that. But when your bank pays you interest on that balance, that interest counts as income to the IRS. You owe federal income tax on it, and depending on your state, you may owe state income tax too. The amount of tax depends on how much interest you earned and your overall income for the year.

Your bank will send you a form called a 1099-INT (Interest Income) if you earned $10 or more in interest during the calendar year. You report that interest on your tax return. If you earned less than $10, your bank may not send the form, but you still owe tax on the interest—you have to report it yourself.

Key Takeaways

  • Interest earned in a savings account is taxable income; the principal you deposit is not.
  • Banks send a 1099-INT form when interest reaches $10 or more in a calendar year, and you report that amount on your federal tax return.
  • The tax rate on interest depends on your overall income and tax bracket, not on a fixed rate for savings accounts.
  • Some savings accounts (like those in IRAs or 529 plans) have tax-deferred or tax-free growth, but a regular savings account has no such protection.

How the IRS treats savings account interest

The IRS classifies interest income as ordinary income, which means it is taxed at the same rate as wages or salary. If you are in the 22% tax bracket, interest is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%. The interest itself does not determine your bracket—your total income does.

This matters because even small interest earnings can push you into a higher tax bracket if your income is close to a bracket boundary. For most people with modest savings, the effect is small. But if you have a large balance earning high interest rates, the tax bill can be meaningful.

You also owe self-employment tax on interest only if you are self-employed and the interest is from a business savings account. For personal savings accounts, you owe only income tax, not self-employment tax.

When your bank reports interest to the IRS

Your bank tracks interest paid to you throughout the year. By January 31 of the following year, if you earned $10 or more in interest during the previous calendar year, the bank must send you a 1099-INT form and file a copy with the IRS.

If you earned less than $10, the bank is not required to send the form, but you still owe tax on that interest. You report it on your return even without the form. The IRS has a record of your account at that bank, so underreporting or omitting small amounts of interest can trigger a mismatch notice.

If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add all the interest together on your tax return.

Savings account types that avoid or defer interest tax

A regular savings account offers no tax shelter. But some account structures do protect interest from when ready taxation:

  • Traditional IRA or Roth IRA: Interest earned inside an IRA grows tax-deferred (traditional) or tax-free (Roth). You do not report the interest each year. Withdrawals are taxed differently depending on the account type.
  • 529 college savings plan: Interest and growth are tax-free if used for may have access to education expenses. If withdrawn for other purposes, the earnings portion is taxed plus a 10% penalty.
  • Health Savings Account (HSA): Interest grows tax-free if the money is used for may have access to medical expenses.
  • Coverdell Education Savings Account: Similar to a 529, interest is tax-free for may have access to education expenses.

If you have the option to save in one of these accounts instead of a regular savings account, the tax savings can be substantial over time, especially if interest rates are high.

What to do when you receive a 1099-INT

When your 1099-INT arrives, check it for accuracy. The form shows the account number (usually partial), the interest amount, and any federal income tax already withheld (which is rare for savings accounts but possible in some cases).

If the amount is wrong, contact your bank when ready. Banks sometimes make errors. Ask for a corrected form if the interest figure does not match your account statements. Keep a copy of the corrected form for your records.

Report the interest amount from the 1099-INT on Schedule B (Interest and Ordinary Dividends) if you are filing a full tax return, or on Form 1040 directly if you are using a simplified return. If you use tax software, it will prompt you to enter the 1099-INT information.

State income tax on savings interest

Most states tax interest income the same way the federal government does—as ordinary income at your state tax rate. A few states do not have income tax (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming), so residents of those states owe no state tax on savings interest.

Some states offer limited breaks for interest earned by residents over a certain age (usually 65 or older). New York, for example, excludes up to $20,000 in retirement income (including interest) for residents 59½ and older. Check your state's tax website or ask a tax preparer whether you may have access to for any exemptions.

Frequently Asked Questions

Do I owe tax on interest if I earned less than $10?

Yes. Your bank does not have to send a 1099-INT if interest is under $10, but you still owe tax on it. Report it on your return. The IRS knows about your account, so omitting small amounts can trigger a notice.

What if I moved money between savings accounts during the year?

Moving money does not create a taxable event. Only the interest your bank paid you is taxable. The principal—the money you deposited—is never taxed, no matter how many times you move it.

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

No. You report the full interest amount on your tax return. Savings account fees are not deductible. However, if a bank charged you a fee that reduced your interest below what was actually earned, ask the bank for a corrected 1099-INT.

Is interest from a joint savings account split between owners for tax purposes?

Not automatically. The bank reports the full interest amount on a 1099-INT to whoever the account is registered under. If the account is truly joint and both owners contributed equally, you may need to split the interest on your separate returns. Keep records of who contributed what and when.

What happens if I close a savings account mid-year?

You still owe tax on all interest earned up to the closing date. The bank includes that interest on the 1099-INT for the year the account closed. Closing an account does not erase the tax obligation.