Savings account interest counts as ordinary income on your tax return

The interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or salary — you report it, and you owe federal income tax on it. Some states also tax savings interest. This applies to every type of savings account: regular savings, money market accounts, certificates of deposit (CDs), and high-yield savings accounts.

Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. You use this form to report the interest on your tax return. If you earned less than $10, the bank may not send a form, but you still owe tax on the interest — you have to report it yourself.

The amount of tax you owe depends on your total income and your tax bracket. Someone in the 22% tax bracket owes roughly 22 cents in federal tax for every dollar of interest earned. Someone in the 12% bracket owes roughly 12 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 when you earn $10 or more in a calendar year.
  • You report this interest as income on your federal tax return, and you owe tax at your marginal tax rate.
  • Many states also tax savings interest, so check your state's rules if you live in a state with income tax.
  • 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 the bank sends you Form 1099-INT

Your bank mails or emails Form 1099-INT by January 31 each year. It shows the total interest you earned in that calendar year across all accounts you hold at that bank. If you have accounts at multiple banks, each bank sends its own 1099-INT.

You need this form to fill out your tax return accurately. The IRS gets a copy too, so if you don't report the interest and the IRS sees the 1099-INT, they will notice the discrepancy. The bank is required to send the form if you earned $10 or more. If you earned less, ask the bank whether they sent one — some do anyway, and some don't.

If you did not receive a 1099-INT by early February and you believe you should have, contact your bank and ask them to send it or confirm the amount. You need the exact figure to file your return.

How to report savings interest on your tax return

On your federal return, you report savings interest on Schedule B (Interest and Ordinary Dividends) if you use the long form, or directly on the 1040 if you use the short form. The exact line depends on which form you file, but the process is straightforward: you enter the amount from your 1099-INT, and that amount gets added to your other income.

If you use tax software like TurboTax, H&R Block, or TaxAct, you enter the 1099-INT information when prompted, and the software calculates where it goes. If you file by hand or with a tax preparer, give them the 1099-INT and they will handle the placement.

The interest is taxed at your marginal tax rate — the rate that applies to your highest dollar of income. If you earn $50,000 and your savings interest is $500, that $500 is taxed at whatever bracket your $50,500 total income falls into, not at a special rate.

State income tax on savings interest

Most states that have income tax also tax savings interest the same way the federal government does. You report it on your state return using the same 1099-INT form. A few states do not tax interest income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. New Hampshire and Tennessee tax only interest and dividend income, not wages.

If you live in a state with income tax, check your state's tax agency website or ask a tax preparer what form you use to report interest. The process is similar to federal reporting but the form names vary by state.

Tax-advantaged accounts where interest is not when ready taxable

Interest earned inside a traditional IRA, Roth IRA, or 401(k) is not taxed in the year you earn it. With a traditional IRA or 401(k), you pay tax when you withdraw the money in retirement. With a Roth IRA, you pay no tax on the withdrawals if you follow the rules. This is one reason these accounts are valuable — your interest compounds without being reduced by annual tax bills.

A regular savings account at a bank is not tax-advantaged. Interest is taxed every year. If you have money you will not need for several years, moving it to an IRA or 401(k) (if you are may be able to access) can reduce your annual tax burden and let your money grow faster.

A 529 college savings plan is another tax-advantaged option: interest and investment gains are not taxed if you use the money for may have access to education expenses. Health Savings Accounts (HSAs) also grow tax-free if used for medical costs.

What happens if you don't report savings interest

If you earned interest and did not report it on your tax return, the IRS will likely catch it because the bank reported it on the 1099-INT. The IRS matches 1099 forms to returns automatically. If your return shows no interest income but the bank reported interest to the IRS, you will receive a notice asking you to explain the discrepancy or pay the tax you owe plus interest and penalties.

The penalty for not reporting income is typically 20% of the unpaid tax, plus interest that accrues from the original due date. If the underpayment was unintentional and you correct it quickly, the IRS may reduce or waive the penalty, but you will still owe the tax and interest. It is much simpler to report the interest when you file.

Strategies to reduce tax on savings interest

You cannot avoid tax on savings interest, but you can reduce how much interest you earn and therefore how much you owe. High-yield savings accounts pay more interest than regular savings accounts, but the extra interest is also taxable. If you are in a high tax bracket, the after-tax return on a high-yield account may be lower than you expect.

One approach is to keep only the money you need for emergencies or near-term expenses in a taxable savings account, and move longer-term savings into a tax-advantaged account like an IRA if you are may be able to access. Another is to use a CD ladder — buying multiple CDs that mature at different times — to manage when interest is earned and reported, though this does not eliminate the tax, only spreads it across years.

If you have very little income in a particular year, you might owe no federal tax on savings interest because your income falls below the standard deduction. But you still have to report it on your return.

Frequently Asked Questions

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

The bank is not required to send you a 1099-INT if you earned less than $10, but you still owe tax on the interest. You must report it on your return using the actual amount you earned. Check your account statements or ask the bank for the exact figure.

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

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

Is interest in a Roth IRA taxable?

Interest earned inside a Roth IRA is not taxed while it sits in the account. When you withdraw money in retirement, you owe no tax on the interest or gains if you follow the Roth rules (account open at least five years, you are age 59½ or meet another exception). This is a major advantage over regular savings accounts.

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 charges you a fee that exceeds your interest, your net interest could be negative — in that case, you report zero interest income, not a loss.

What if the 1099-INT shows the wrong amount?

Contact your bank when ready and ask them to issue a corrected form (called an amended 1099-INT). Do not file your tax return until you have the correct amount. If you already filed and the amount was wrong, you can file an amended return using Form 1040-X once you have the corrected 1099-INT.