Savings account interest counts as income the IRS taxes every year

Interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or freelance earnings — you report it on your tax return and pay federal income tax on it. Most states also tax savings interest as part of your state income tax, though a few states do not.

Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. This form shows exactly how much interest you earned, and you use it to fill out your tax return. Even if your bank does not send you a 1099-INT because your interest was under $10, you still owe tax on whatever you earned — you just have to report it yourself.

The amount of tax you pay depends on your total income and your tax bracket. Someone in the 12 percent federal tax bracket pays roughly 12 cents in federal tax for every dollar of interest earned. Someone in the 22 percent bracket pays roughly 22 cents per dollar. State tax, if your state has it, stacks on top of that.

Key Takeaways

  • Banks report savings interest to the IRS on Form 1099-INT if you earn $10 or more in a year, and you must report all interest on your tax return regardless of the amount.
  • The tax rate on your interest depends on your overall income and which tax bracket you fall into, not on the interest rate itself.
  • You report interest income on your federal return using Schedule 1 (Form 1040), and most states require you to report it on your state return as well.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw the money, but interest in a regular savings account is taxed every year.

When your bank sends you the 1099-INT form

Your bank mails or emails Form 1099-INT by January 31 each year if you earned at least $10 in interest during the previous calendar year. The form shows the total interest paid to you across all accounts you hold at that bank. If you have accounts at multiple banks, each bank sends its own 1099-INT.

You receive Copy B of the form (the one you keep for your records) and Copy C goes to the IRS. The IRS matches what your bank reports to what you report on your tax return, so if you forget to include the interest, the IRS will likely catch it and send you a notice.

If you earned less than $10 in interest, your bank may not send a 1099-INT at all. You still owe tax on that interest — you just have to add it to your return yourself. Check your bank statements from the previous year to find the exact amount if you do not receive a form.

How to report interest on your tax return

You report savings interest on Schedule 1 (Form 1040), which is part of your federal tax return. Line 8 of Schedule 1 is labeled "Interest" — that is where you enter the total from all your 1099-INT forms, plus any interest your bank did not report.

If you use tax software like TurboTax, H&R Block, or TaxAct, you enter the interest amount when the software asks about interest income, and it automatically puts it in the right place. If you file by hand or with a tax preparer, give them all your 1099-INT forms and any statements showing unreported interest.

Your state tax return usually has a similar line for interest income. Some states follow federal rules exactly; others have slightly different thresholds or reporting requirements. Check your state's tax agency website or ask a tax preparer if you are unsure whether your state taxes interest.

The difference between regular savings and tax-advantaged accounts

Interest in a regular savings account, money market account, or certificate of deposit (CD) is taxed every year. Interest in a traditional IRA or 401(k) is not taxed until you withdraw the money — sometimes decades later. Interest in a Roth IRA is never taxed, as long as you follow the withdrawal rules.

This is one reason people use retirement accounts: the tax delay or tax-free growth lets your money compound faster. A dollar earning 4 percent interest in a regular savings account might net you only 3 cents after taxes (depending on your bracket). The same dollar in a Roth IRA earns the full 4 cents and never gets taxed.

If you have money you will not need for several years, moving some of it into a Roth IRA or increasing your 401(k) contribution can reduce your annual tax bill. You have contribution limits — for 2024, you can put up to $7,000 per year into an IRA if you are under 50, and up to $23,500 into a 401(k) — but the tax savings often make it worth doing.

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 return, the IRS will notice the mismatch and send you a notice asking for the missing income and any tax owed, plus penalties and interest charges. The penalty is usually 20 percent of the unpaid tax, and interest accrues daily until you pay.

If the amount is small — say, $50 in interest — the IRS may not pursue it aggressively, but they can. It is simpler and cheaper to report it correctly the first time. If you filed a return without reporting interest and the important date to amend it has not passed, you can file Form 1040-X (Amended U.S. Individual Income Tax Return) to add the income and pay what you owe.

The statute of limitations for the IRS to assess tax is usually three years from the date you filed, though it can be longer if you underreported income by 25 percent or more. Reporting interest correctly protects you from this risk.

Strategies to reduce tax on savings interest

If you are earning significant interest — say, $500 or more per year — you have a few options to reduce the tax hit. The simplest is to move money into a high-yield savings account at a bank that offers better rates, because you will owe the same tax on $500 earned at 4 percent as on $500 earned at 0.5 percent. The higher rate lets you reach your savings goal faster and pay the same tax.

A second option is to prioritize tax-advantaged accounts. If you have earned income, you can contribute to a traditional IRA and deduct the contribution from your taxable income, which lowers the tax you owe on your interest and other income. A Roth IRA does not give you a deduction, but the interest grows tax-free forever.

A third option is to hold bonds or bond funds in a taxable account and stocks in a retirement account. Bond interest is taxed as ordinary income at your full tax rate, while long-term capital gains (from stocks held over a year) are taxed at lower rates. This is a more advanced strategy and works best if you have substantial savings across multiple account types.

State taxes on savings interest

Most states tax savings interest as part of your state income tax return. However, a handful of states do not have an income tax at all — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — so residents of those states owe no state tax on interest. New Hampshire and Tennessee tax only interest and dividend income, not wages.

If you live in a state with income tax, you report interest the same way you do on your federal return: on a schedule or line for interest income. The tax rate varies by state. Some states tax interest at the same rate as wages; others have a flat tax rate that applies to all income.

If you moved during the year or earned interest in multiple states, you may need to file returns in more than one state. This is rare for savings interest alone, but it can happen if you worked in one state and retired to another mid-year. A tax preparer can help you figure out which states you owe tax to.

Frequently Asked Questions

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

Yes. The $10 threshold is only when your bank must send you a 1099-INT form. You still owe tax on any interest you earned, even if it is $1. You report it yourself on your tax return using your bank statements as proof.

What if I have multiple savings accounts at the same bank?

Your bank combines the interest from all your accounts at that bank into one 1099-INT form. If you have accounts at different banks, each bank sends its own form. You add up all the forms and report the total on your tax return.

Can I deduct savings account fees from my interest income?

No. You report the full interest amount your bank paid you. Fees you paid the bank are not deductible against interest income. However, if you paid a tax preparer to file your return, that fee may be deductible as a miscellaneous expense, depending on your situation and the year.

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

Yes. Money market accounts, savings accounts, and CDs are all taxed the same way — the interest is reported on Form 1099-INT and taxed as ordinary income. The only difference is the interest rate and how quickly you can withdraw money.

What if my bank made an error on my 1099-INT?

Contact your bank and ask them to issue a corrected form (Form 1099-INT with "CORRECTED" printed on it). Once you receive the corrected form, file an amended tax return using Form 1040-X if you already filed. The IRS will match the corrected form to your amended return.