Interest on your savings account is taxable income

Yes. The interest your bank pays you on a savings account counts as income, and you owe federal income tax on it. Your bank will send you a form at the end of the year showing how much interest you earned, and you report that amount on your tax return just like you would report wages from a job.

The amount of tax you actually pay depends on your total income for the year and which tax bracket you fall into. Someone earning $30,000 a year will pay a lower percentage on that interest than someone earning $150,000. The interest itself is the same — the tax rate applied to it is what changes.

Most people with savings accounts earn very little interest, so the tax bill is small. But it is real, and you need to know about it so you are not surprised when you file your return.

Key Takeaways

  • Your bank reports all interest earned to the IRS on a form called a 1099-INT, which you receive by January 31 each year.
  • You must report this interest as income on your federal tax return, even if the amount is small.
  • The tax you owe on the interest depends on your total income and your tax bracket, not on the interest amount alone.
  • Some states also tax savings account interest, while others do not — this varies by where you live.
  • 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.

How your bank reports interest to the IRS

At the end of each calendar year, your bank calculates the total interest you earned on your account and sends you a Form 1099-INT. This form shows the interest amount and goes to both you and the IRS. You receive your copy by January 31, which gives you time to include it in your tax return before the April important date.

If you earned less than $10 in interest during the year, your bank may not be required to send you a 1099-INT, but you still owe tax on that interest if you file a return. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one.

Keep your 1099-INT forms in a safe place. You will need them when you file your taxes, and the IRS has a copy too, so the numbers need to match what you report.

What tax bracket means and why it matters

Your tax bracket is the percentage of your income you owe in federal income tax. The more you earn, the higher your bracket. For 2024, a single person with no dependents might pay 10% on the first $11,000 of income, then 12% on income between $11,000 and $44,725, and so on.

The interest you earn is added to your other income for the year. If you earned $35,000 in wages and $50 in savings account interest, your taxable income is $35,050. That extra $50 is taxed at whatever bracket applies to your total income — in this case, the 12% bracket. So you would owe about $6 in federal tax on that interest.

This is why two people earning the same $50 in interest can owe different amounts of tax. The person earning $20,000 a year might owe $5, while the person earning $100,000 a year might owe $12 on the same $50 in interest.

State income tax on savings interest

Whether you owe state income tax on savings interest depends on where you live. Most states that have an income tax tax savings account interest the same way the federal government does — you report it on your state return and pay tax based on your state tax bracket.

A few states do not tax interest income at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you still owe federal tax on your savings interest, but you do not owe state tax.

Some states offer tax breaks for interest earned on savings accounts held by people over a certain age, usually 65. If you think this might explore to you, check your state's tax department website or ask a tax preparer.

How much interest you actually earn (and why it is usually small)

The interest rate on a regular savings account varies by bank and changes over time. Currently, rates range from nearly 0% at some large national banks to around 4% or 5% at online banks and credit unions. The higher the rate, the more interest you earn — and the more tax you owe on it.

If you have $5,000 in a savings account earning 0.01% interest, you earn about 50 cents a year. If that same $5,000 is in an account earning 4.5%, you earn about $225 a year. The tax on $225 depends on your bracket, but at 12% federal tax, you would owe about $27.

This is why most people with small savings balances do not worry much about the tax. The interest is real income, but the amount is usually small enough that it does not change your overall tax bill much.

Tax-advantaged accounts where interest is not taxed yearly

If you want to save money without paying tax on the interest every year, you have other options. A traditional IRA or 401(k) allows your money to grow without annual tax. You pay tax only when you withdraw the money in retirement, which may be decades later.

A Roth IRA is different — you pay tax on the money you put in, but then the interest and growth are never taxed, even when you withdraw it. This can be a big advantage if you have time for your money to grow.

These accounts have rules about how much you can put in each year and when you can take the money out without a penalty. But if you are saving for retirement and want to avoid yearly tax on interest, they are worth learning about. Your bank or a tax preparer can explain which option makes sense for your situation.

What to do when you receive your 1099-INT

When your 1099-INT arrives in January, check the amount carefully. Make sure it matches what you see in your account statements. If there is a mistake, contact your bank right away and ask them to send you a corrected form.

When you file your tax return, you will report the interest amount from your 1099-INT on a line for interest income. If you use tax software, it will ask you for this number. If you use a tax preparer, bring your 1099-INT with you.

Keep a copy of your 1099-INT for your records. The IRS keeps a copy too, so if you do not report it, they will notice. Reporting it is straightforward and takes just a few minutes.

Frequently Asked Questions

Do I have to report interest if I only earned a few dollars?

If you earned any interest and you file a tax return, you should report it. The IRS has a copy of your 1099-INT, so they know about it. The amount does not have to be large to matter — even $5 in interest should be reported if you are filing a return.

What if I earned interest but did not get a 1099-INT?

If you earned less than $10, your bank may not send one, but you still owe tax on the interest. Check your year-end account statement to see how much you earned, and report that amount on your return. If you earned more than $10 and did not receive a form, contact your bank.

Can I deduct anything to lower the tax I owe on interest?

You cannot deduct the interest itself, but if you have other deductions — like mortgage interest or charitable donations — those can lower your overall taxable income, which in turn lowers the tax on your interest. A tax preparer can help you figure out what you can deduct.

Is interest from a money market account taxed the same way?

Yes. Money market accounts, savings accounts, and certificates of deposit (CDs) all earn interest that is taxed as ordinary income. You will receive a 1099-INT for each one and report the total on your tax return.

What happens if I move my money to a different bank during the year?

You will receive a 1099-INT from each bank showing the interest earned while your money was there. Add them all together and report the total on your tax return. Moving money between banks does not change the fact that you owe tax on the interest earned.