The short answer: interest your bank pays you is taxable income

Any interest your savings account earns counts as income on your tax return. The bank reports it to you and to the IRS, and you owe federal income tax on it at your regular tax rate. Some states also tax savings interest, though rules vary by where you live. The amount is usually small — a few dollars on a modest balance — but it still has to be reported.

You do not have to do anything special to earn this interest. Your bank automatically adds it to your account. But when tax time comes, you will see it reported on a form called a 1099-INT, and you will need to include it when you file your return.

Key Takeaways

  • Banks report savings interest to the IRS on a 1099-INT form, and you must report it as income on your tax return.
  • You pay federal income tax on savings interest at your regular tax rate, which depends on your total income and filing status.
  • Some states tax savings interest and some do not — check your state's rules or ask your bank.
  • Interest under $10 for the year is usually not reported on a 1099-INT, but you may still owe tax on it depending on your situation.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means more taxable income.

How the IRS knows about your interest

Your bank sends a copy of your interest earnings to the IRS every January. This report is the 1099-INT form. Your bank also sends you a copy — usually by mail or through your online account — so you know what amount to report on your tax return.

The bank is required to do this for any account that earned $10 or more in interest during the year. If you earned less than $10, the bank may not send a 1099-INT, but you can still find your interest total in your account statements or by logging into your online banking. Even if you do not receive a 1099-INT, you should still report the interest if you earned any.

What tax rate applies to your interest

Savings interest is taxed as ordinary income, meaning it is taxed at the same rate as wages from a job. Your tax rate depends on how much total income you earned that year and your filing status (single, married, head of household, and so on). The more income you have, the higher your tax rate.

For example, if you are single and earned $35,000 in wages plus $50 in savings interest, that $50 is taxed at whatever rate applies to your $35,050 total income. You do not pay a separate "interest tax" — it all goes into one calculation.

If your total income is very low, you may not owe any federal income tax at all, even if you earned interest. The IRS sets a threshold called the standard deduction, and if your income is below that amount, you owe no federal tax. That threshold changes each year and depends on your age and filing status.

State taxes on savings interest

Whether you owe state income tax on savings interest depends on which state you live in. Most states that have an income tax treat savings interest the same way the federal government does — as ordinary income. A few states do not tax interest income at all.

If you live in a state with no income tax — such as Florida, Texas, or Wyoming — you will not owe state tax on your savings interest. If you live in a state with income tax, check your state's tax agency website or ask your bank whether savings interest is taxed. The rules are straightforward, but they do vary.

Why high-yield savings accounts mean more tax

A high-yield savings account earns interest at a much higher rate than a traditional savings account at a large bank. This is good for growing your money, but it also means more taxable income each year.

For example, $10,000 in a traditional savings account earning 0.01% interest would generate $1 in annual interest. The same $10,000 in a high-yield account earning 4% or 5% would generate $400 to $500 in annual interest. That extra $400 is income you will owe tax on. This is not a reason to avoid high-yield accounts — the interest you earn still outweighs the tax — but it is worth knowing when you are planning your finances.

How to report interest on your tax return

When you file your federal tax return, you will report your interest income on a form or schedule that asks for income from interest and dividends. If you use tax software, it will walk you through entering this information. If you file by hand or work with a tax preparer, they will know where to put it.

You do not need to attach your 1099-INT to your return, but keep it with your records in case the IRS asks questions later. If you have multiple savings accounts at different banks, each bank sends its own 1099-INT, and you add up all the interest amounts when you report.

If you earned less than $10 in interest and did not receive a 1099-INT, you still report the interest if you earned any. Look at your account statements or year-end summary from your bank to find the exact amount.

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 the bank reported. This can trigger a letter asking for an explanation or a request to pay the tax you owe plus penalties and interest.

The amount of interest on a savings account is usually small, so the tax owed is small too. But reporting it correctly keeps you in good standing with the IRS and avoids unnecessary complications. It takes only a few seconds to include it on your return.

Frequently Asked Questions

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

The bank does not have to send you a 1099-INT if you earned less than $10, but you should still report any interest you earned on your tax return. Check your account statements for the exact amount. Reporting it correctly, even if it is small, keeps your records accurate.

Can I deduct savings account fees from my interest income?

No. You report the full interest amount as income. You cannot subtract fees or other expenses from it. However, some tax situations allow you to deduct investment-related expenses, but a regular savings account does not may have access to. Talk to a tax preparer if you have questions about your specific situation.

What if I opened a savings account late in the year and earned very little interest?

You still report whatever interest you earned, no matter when you opened the account or how small the amount. The bank will report it on a 1099-INT if it is $10 or more. If it is less, include it anyway based on your account statement.

Does moving money between my own savings accounts count as taxable income?

No. Transferring money from one account to another is not income — it is just moving your own money around. Only the interest the bank pays you is taxable. Deposits you make from your paycheck or other sources are not taxable either.

If I earned interest in a joint account, do both people owe tax on it?

The bank reports the interest to the IRS, and you and the other account holder will need to decide how to split it for tax purposes. Usually, each person reports their share based on how much of the account balance belonged to them. Talk to a tax preparer about how to handle this correctly on your individual returns.