Yes, you owe federal tax on savings interest, and New Jersey has its own rules too

Interest earned in a savings account is taxable income. The IRS treats it the same way it treats wages or freelance income — you report it on your tax return and pay federal income tax on it. New Jersey also taxes savings interest as ordinary income, with one exception: if you are 60 or older, the state allows you to exclude up to $25,000 of retirement income per year, which can include interest from certain accounts.

The bank or credit union holding your account will send you a Form 1099-INT each January showing how much interest you earned the previous year. You use that number to fill out your federal return. New Jersey uses the same federal income figure when calculating your state tax, unless you may have access to for that age-based exclusion.

How much tax you actually owe depends on your total income and your tax bracket — the more you earn, the higher the percentage of your interest that goes to taxes. A person in the 22% federal bracket pays 22 cents in federal tax on every dollar of interest. Add New Jersey's state income tax (which ranges from 1.4% to 10.75% depending on income), and the combined rate can be significant.

Key Takeaways

  • Banks report all savings interest to the IRS on Form 1099-INT, and you must report it on your federal tax return regardless of the amount.
  • New Jersey taxes savings interest as ordinary income at the state level, using the same federal income figure.
  • If you are 60 or older, New Jersey allows you to exclude up to $25,000 of retirement income per year, which may include interest from IRAs, pensions, and certain other accounts.
  • Your tax rate on interest depends on your total income for the year — the higher your income bracket, the more you pay in tax on that interest.

When the bank reports your interest to the IRS

Your bank or credit union generates a Form 1099-INT for any account that earned $10 or more in interest during the calendar year. The bank sends copies to you and to the IRS by January 31 of the following year. Even if you do not receive the form, you still owe tax on the interest — the IRS has a record of it.

The 1099-INT shows the total interest earned in that account. If you have multiple savings accounts at different institutions, you will receive a separate 1099-INT from each one. You add all of them together when you report your income on your federal return (usually Form 1040).

If you earned less than $10 in interest at a particular bank, that institution may not send you a 1099-INT, but you still owe tax on it. Keep your own records of interest earned so you can report it accurately.

How New Jersey taxes your savings interest

New Jersey does not have a separate tax on savings interest. Instead, the state treats it as ordinary income and taxes it at the same rates as wages or other income. The state income tax brackets range from 1.4% on the lowest incomes to 10.75% on incomes over $500,000 (as of 2024, though rates change annually).

When you file your New Jersey state return, you report the same interest income you reported to the federal government. The state uses that figure to calculate how much state tax you owe. There is no New Jersey form specifically for interest income — it all goes on your main state return.

One exception exists: New Jersey's retirement income exclusion. If you are 60 or older, you can exclude up to $25,000 of retirement income per tax year. This can include interest from IRAs, 401(k)s, pensions, and annuities. Interest from a regular savings account does not may have access to unless it is held inside a retirement account like an IRA.

The retirement income exclusion for residents 60 and older

New Jersey allows residents age 60 and older to exclude up to $25,000 of retirement income from state taxation each year. This exclusion applies to distributions from IRAs, 401(k)s, 403(b)s, pensions, and annuities. If your savings account is held inside an IRA, the interest it earns counts as retirement income and may may have access to for the exclusion.

To claim this exclusion, you must file New Jersey Form NJ-1040 and complete Schedule A (Retirement Income Exclusion). You will need to show proof of your age and document which income sources may have access to. The exclusion is limited to $25,000 per person per year, so if your retirement income exceeds that amount, only the first $25,000 is excluded from state tax.

A regular savings account held outside a retirement account does not may have access to for this exclusion, even if you are 60 or older. The exclusion applies only to accounts specifically designed for retirement savings.

What happens if you do not report the interest

The IRS receives a copy of every 1099-INT your bank sends to you. If you do not report that interest on your federal return, the IRS will notice the discrepancy. The agency matches 1099 forms to tax returns automatically, and missing income triggers an audit notice.

Penalties for unreported income include back taxes, interest on those taxes (currently around 8% per year), and a failure-to-file penalty of 5% per month (up to 25% total). If the IRS determines the omission was intentional, fraud penalties can reach 75% of the unpaid tax.

New Jersey also matches your federal return to your state return. If you reported interest to the IRS but not to New Jersey, the state will bill you for the unpaid state tax plus interest and penalties. It is simpler and cheaper to report the interest correctly from the start.

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 tax you owe. High-yield savings accounts pay more interest than traditional savings accounts, which means more taxable income — this is a trade-off you make deliberately.

If you have a large amount of savings, you might split it between a taxable savings account and a tax-advantaged retirement account like a Roth IRA or traditional IRA. Interest earned inside an IRA is not taxed each year the way interest in a regular savings account is. With a Roth IRA, you pay no tax on the interest at all when you withdraw it in retirement (subject to holding period rules). With a traditional IRA, you defer the tax until you withdraw the money.

Another option is to hold savings in a 529 college savings plan if you have children or grandchildren. Interest earned in a 529 is not taxed at the federal or state level as long as you use the money for may have access to education expenses.

For most people, the simplest approach is to report the interest you earn and pay the tax owed. The tax on savings interest is usually modest compared to the benefit of having emergency savings available.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether the bank sends you a 1099-INT form. You still owe tax on any interest you earn, even if it is $1. Keep your own records and report it on your return.

What if I have interest from multiple banks?

Add all the interest together on your federal return. Each bank sends a separate 1099-INT, but you report the total on one line of your Form 1040. Do the same on your New Jersey return.

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

No. You report the gross interest the bank paid you, not the net amount after fees. However, some investment-related fees may be deductible on your federal return under specific circumstances — consult a tax professional about your situation.

Does a money market account get taxed differently than a savings account?

No. Money market accounts, savings accounts, and certificates of deposit all generate interest that is taxed the same way — as ordinary income at both federal and state levels. The bank reports it on a 1099-INT.

If I am 60 and have an IRA, can I exclude all the interest from it?

You can exclude up to $25,000 of retirement income per year, which includes IRA interest. If your IRA earned $30,000 in interest, you exclude $25,000 and report $5,000 as taxable income to New Jersey. Federal tax still applies to the full amount.