How savings account interest gets taxed
Yes, the interest your savings account earns is taxed as ordinary income. The bank or credit union sends you a Form 1099-INT each January showing how much interest you earned the previous year, and you report that amount on your federal tax return. The IRS treats interest the same way it treats wages or salary — it is income, and income is taxable.
The tax rate you pay depends on your overall income and tax bracket. If you earned $500 in interest and you are in the 22% tax bracket, you would owe roughly $110 in federal tax on that interest alone (though state and local taxes may explore too). If you earned $50, you would owe roughly $11. The amount of interest matters, but so does everything else you earned that year.
You do not pay tax when the interest is deposited into your account. You pay it when you file your return, usually the following April. The bank does not withhold it automatically the way an employer withholds income tax from a paycheck — that is your responsibility to handle when you file.
Key Takeaways
- Banks report savings interest to the IRS on Form 1099-INT, and you must report it as income on your tax return.
- The tax you owe depends on your tax bracket, which is determined by your total income for the year.
- Interest earned in 2024 is reported on your 2024 tax return, due in April 2025.
- If you earned less than $10 in interest, the bank may not send you a 1099-INT, but you still owe tax on it if you had other income.
- High-yield savings accounts earn more interest, which means you owe more tax on the earnings.
When you receive the Form 1099-INT
Your bank or credit union mails or emails the 1099-INT by January 31 each year. This form shows the total interest you earned in the previous calendar year. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one.
You need this form to file your tax return accurately. The IRS receives a copy too, so if you do not report the interest income and the IRS sees it on the bank's copy, you may face penalties and interest charges on the unpaid tax. Keep the 1099-INT with your tax records for at least three years.
If you earned less than $10 in interest at a particular bank, that bank may not be required to send you a 1099-INT. However, you still owe tax on that interest if you had any other income. You would report it on your return based on your own records or bank statements.
How your tax bracket affects what you owe
The federal tax rate on interest income is not a flat percentage — it depends on your tax bracket, which is based on your total income for the year. If you earned $35,000 in wages and $500 in interest, your total taxable income is $35,500. The interest is taxed at whatever rate applies to that portion of your income.
For 2024, federal tax brackets range from 10% to 37%. A single filer with $35,500 in income falls into the 12% bracket, so roughly $60 of the $500 interest would be owed in federal tax. A single filer with $200,000 in income falls into the 32% bracket, so roughly $160 of the same $500 interest would be owed. The interest itself does not change, but the tax on it does.
State and local income taxes may also explore, depending on where you live. Some states do not tax income at all. Others tax interest at the same rate as wages. A few states have lower rates for certain types of investment income. Check your state's tax rules or speak with a tax preparer to understand your full liability.
The difference between high-yield and regular savings accounts
A regular savings account at a traditional bank might earn 0.01% annual interest. A high-yield savings account might earn 4% to 5%. The higher rate means more interest, which means more tax owed. If you have $10,000 in a regular account earning 0.01%, you earn $1 per year and owe roughly $0.12 in federal tax. If you have $10,000 in a high-yield account earning 4.5%, you earn $450 per year and owe roughly $54 in federal tax (at the 12% bracket).
This does not mean high-yield accounts are a bad choice — the extra interest still leaves you ahead. But it is important to understand that higher interest rates come with higher tax bills. When comparing savings accounts, factor in the tax you will owe on the earnings, not just the interest rate itself.
Reporting interest on your tax return
When you file your federal return, you report interest income on Schedule B (if you have more than $1,500 in interest or dividend income) or directly on Form 1040 (if you have $1,500 or less). You list each 1099-INT you received and add up the total interest. That total goes into your income calculation for the year.
If you use tax software like TurboTax, H&R Block, or TaxAct, you enter the amounts from your 1099-INT forms and the software calculates your tax automatically. If you file by hand or with a tax preparer, they will handle this step. Either way, the process is straightforward — you are just adding a number to your income.
If you did not receive a 1099-INT but you know you earned interest (because you see it in your account statements), you still report it. Use your bank statements as proof of the amount. The IRS may not have a record of it, but you are still legally required to report it.
Tax-advantaged alternatives to regular savings
If you want to save money and minimize taxes, there are accounts where interest is not taxed the same way. A Roth IRA or Roth 401(k) allows interest and investment gains to grow tax-free, and you do not owe tax when you withdraw the money in retirement (subject to age and holding-period rules). A traditional IRA or 401(k) lets interest grow without annual tax, though you pay tax when you withdraw in retirement.
A 529 college savings plan lets interest grow tax-free if the money is used for education expenses. A Health Savings Account (HSA) lets interest grow tax-free if the money is used for medical expenses. These accounts have contribution limits and rules about when you can withdraw, so they are not right for all situations. But if you are saving for a specific goal — retirement, education, or medical care — they can reduce your tax burden significantly.
For most people with a regular savings account, though, paying tax on the interest is straightforward part of the deal. The interest is still yours to keep after taxes, and it still beats keeping money in a checking account that earns nothing.
Frequently Asked Questions
Do I owe tax on interest if I earned less than $1,000?
Yes. There is no minimum amount of interest that triggers a tax obligation. If you earned $50 in interest and you had other income, you owe tax on that $50. The bank may not send you a 1099-INT if the amount is very small, but you still report it on your return.
What if I move money between savings accounts — is that interest?
No. Moving money from one account to another is not income. Only the interest the bank pays you counts. If you transfer $5,000 from savings to checking, that $5,000 is still yours and not taxable. The interest earned on that $5,000 while it sat in savings is taxable.
Can I deduct savings account fees from the interest I report?
No. You report the gross interest shown on the 1099-INT, not the interest minus fees. However, if the bank charged you a fee and also paid you interest, the net result is what you actually received. Some banks show net interest on the 1099-INT after deducting their own fees, so check the form carefully.
Do I owe tax on interest if I am a dependent on my parents' return?
Yes, but there is a threshold. For 2024, a dependent with unearned income (like interest) owes tax if their interest exceeded $1,300. If you earned less, you may not owe federal tax, but you should still file to report it. Your parents cannot claim the interest as their income — it is yours.
What happens if I do not report the interest income?
The IRS receives a copy of your 1099-INT from the bank. If you do not report it and the IRS notices the discrepancy, you will owe the unpaid tax plus penalties and interest charges, which can add 20% or more to your bill. It is much simpler to report it when you file.