Savings account interest counts as income the IRS taxes

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 have to report it on your tax return, and you may owe federal income tax on it. Some states also tax savings interest. The amount you owe depends on your total income for the year and your tax bracket, not on how much interest you earned.

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 lists the total interest paid to you. You use this number when you file your taxes. Even if you don't receive a 1099-INT because your interest was under $10, you still have to report any interest you earned.

Key Takeaways

  • All savings account interest is taxable income and must be reported on your federal tax return.
  • Your bank sends a Form 1099-INT in January if you earned $10 or more in interest during the previous year.
  • The tax you owe on interest depends on your overall income and tax bracket, not just the interest amount.
  • Some states tax savings interest, while others do not — check your state's rules if you live outside a no-tax state.
  • High-yield savings accounts earn more interest but also create a larger tax bill in the same year.

How the IRS treats savings interest on your tax return

When you file your federal tax return, you report savings interest as part of your total income. On the 1040 form (the main individual tax return), interest income goes on a line labeled "Interest" and gets added to your wages, self-employment income, and any other money you earned. The IRS then applies your tax bracket to your total income, which means the interest you earned gets taxed at whatever rate applies to your highest dollars of income.

If your total income is low enough, you may owe no federal tax at all, even if you earned interest. The standard deduction — a set amount you can subtract from your income before calculating tax — shields a certain amount of income from tax each year. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. If your total income, including interest, falls below these numbers, you owe no federal income tax.

If your income is above the standard deduction, your interest gets taxed at your marginal rate — the percentage that applies to your highest dollars of income. Someone in the 22% tax bracket who earns $500 in savings interest will owe roughly $110 in federal tax on that interest (before any credits or adjustments).

State income tax on savings interest varies by location

Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes interest and dividends but not wages). If you live in one of these states, you owe no state tax on your savings interest.

Every other state taxes savings interest as ordinary income, using the same approach as the federal government. Your state sends you a copy of the 1099-INT information, and you report the interest on your state tax return. Some states have lower tax rates than others, and some offer small deductions for interest income, but the basic rule is the same: interest is income and gets taxed.

If you live in a state that taxes interest and you move to a no-tax state, or vice versa, you may need to file a return in both states for the year you moved. The rules depend on when you moved and how much income you earned in each state.

When you earn very little interest and don't have to report it

If you earned less than $10 in interest during the year, your bank will not send you a 1099-INT. However, you are still required to report the interest on your tax return if you owe any tax at all. In practice, if your total income is below the standard deduction and you owe no federal tax, the IRS is unlikely to pursue you for reporting $5 or $8 in interest.

The safest approach is to report all interest you earned, no matter how small. If you have multiple savings accounts, add up the interest from all of them. Many tax software programs ask you to enter interest income, and some will calculate it for you if you link your bank accounts.

High-yield savings accounts create larger tax bills

A high-yield savings account earns significantly more interest than a traditional savings account — sometimes 4% to 5% annually, compared to 0.01% or less at many large banks. This higher interest is attractive, but it also means a larger amount of taxable income in the same year.

If you have $50,000 in a high-yield account earning 4.5%, you will earn roughly $2,250 in interest over the year. That $2,250 is fully taxable. If you are in the 22% federal tax bracket and your state taxes income at 5%, you will owe about $675 in combined federal and state tax on that interest. The after-tax return on your money is lower than the advertised rate.

This does not mean high-yield accounts are a bad choice — they still beat traditional savings accounts after tax — but it is worth doing the math before you move money. Some people use high-yield accounts for short-term savings and keep long-term money in tax-advantaged accounts like Roth IRAs or 529 plans, where interest and growth are not taxed annually.

How to report interest on your tax return

If you use tax software like TurboTax, H&R Block, or TaxAct, the process is straightforward. The software will ask you about interest income and may let you upload your 1099-INT directly. You enter the total interest from the form, and the software adds it to your income and calculates your tax.

If you file by hand or use a tax professional, you will need your 1099-INT forms and a calculator. Add up all interest from all accounts. Write the total on the "Interest" line of your 1040 form (Schedule 1, line 2a for 2024). If you earned more than $1,500 in interest, you also have to file Schedule B, which asks for details about each account and any interest that was not reported on a 1099-INT.

If you earned interest but did not receive a 1099-INT (because it was under $10, or because the bank made a mistake), you still report it. Write the amount on the interest line and note that it was not reported on a 1099-INT. Keep your bank statements as proof in case the IRS asks questions.

Tax-advantaged alternatives to regular savings accounts

If you want to save money and avoid annual taxes on interest, you have options. A Roth IRA lets you contribute up to $7,000 per year (for 2024) and earn interest tax-free forever — you never pay tax on the growth, and you can withdraw the money tax-free after age 59½. A 529 education savings plan works similarly for money you are saving for college: interest and growth are not taxed as long as you use the money for education.

A Health Savings Account (HSA) is another option if you have a high-deductible health plan. You can contribute up to $4,150 per year (for 2024), earn interest tax-free, and withdraw the money tax-free for medical expenses. If you withdraw for non-medical reasons after age 65, you pay income tax but not the 20% penalty that applies to younger withdrawals.

These accounts have contribution limits and rules about when you can withdraw, so they are not right for all savings goals. But if you have money you plan to keep invested for years, they can save you significant tax compared to a regular savings account.

Frequently Asked Questions

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

Your bank will not send you a 1099-INT if you earned less than $10, but you are still required to report the interest on your tax return. In practice, if your total income is below the standard deduction and you owe no tax, the IRS is unlikely to pursue you for small amounts. The safest approach is to report it anyway.

What if my bank sent me a 1099-INT with the wrong amount?

Contact your bank and ask them to issue a corrected form. If they do, they will send you a corrected 1099-INT and file a corrected version with the IRS. You then file an amended tax return using Form 1040-X to correct your reported interest. Keep the corrected 1099-INT with your records.

Can I deduct losses from a savings account against my interest income?

No. Savings accounts do not produce losses — the worst that happens is you earn zero interest. You cannot deduct anything against your interest income. However, if you have investment losses from stocks or bonds, you can use those to offset investment gains, with some limits.

Does interest from a joint account get split between owners for tax purposes?

Not automatically. The person whose Social Security number is on the account receives the 1099-INT. If you own the account jointly but only one of you provided a Social Security number, that person gets the form and reports all the interest. If you want to split the tax burden, you will need to file amended returns or work with a tax professional to allocate the interest correctly.

What if I earned interest in a foreign country?

You must report all interest earned worldwide on your U.S. tax return, including interest from foreign bank accounts. If you have more than $10,000 in foreign accounts at any point during the year, you also have to file Form FBAR (Foreign Bank Account Report) with the Treasury Department. A tax professional can help you navigate these rules.