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 freelance earnings — you owe federal income tax on the full amount. Your state may tax it too, depending on where you live. This applies to every type of savings account: regular savings, high-yield savings, money market accounts, and certificates of deposit.

The bank reports this interest to the IRS on a Form 1099-INT, and they send you a copy by January 31 each year. You then report that amount on your tax return. You cannot ignore it just because the amount is small.

Key Takeaways

  • All savings account interest is taxable federal income, reported to the IRS on Form 1099-INT.
  • You report the interest on your tax return even if the bank does not withhold taxes from it.
  • Interest under $10 in a year may not generate a 1099-INT, but it is still technically taxable.
  • State income tax on savings interest varies by state — some states do not tax it at all.
  • The tax rate you pay depends on your overall income and tax bracket, not on the interest rate itself.

How the IRS knows about your interest

Banks are required to report interest paid to depositors. If your account earned $10 or more in interest during the calendar year, the bank files a Form 1099-INT with the IRS and mails you a copy. The form shows your name, Social Security number, and the exact amount of interest paid.

Even if you earned less than $10 — which happens with many regular savings accounts — the interest is still taxable. The $10 threshold is just the reporting requirement, not a tax exemption. You are responsible for reporting it whether or not you receive a 1099-INT.

The bank does not withhold taxes from savings interest the way an employer withholds from your paycheck. You pay the tax when you file your return, or through estimated quarterly payments if you have other income sources that require it.

What tax rate applies to your interest

Savings interest is taxed as ordinary income, meaning it is added to your other income and taxed at your marginal tax rate. If you earn $50,000 in wages and $500 in savings interest, the IRS treats you as having $50,500 in taxable income.

Your marginal rate depends on your total income and filing status. For 2024, a single filer in the 22% bracket pays 22% on that $500 in interest — $110. Someone in the 12% bracket pays $60 on the same $500. The interest itself does not determine the rate; your overall income does.

This is different from long-term capital gains, which have their own lower tax rates. Savings interest gets no special treatment.

State taxes on savings interest

Federal tax is only part of the picture. Your state may also tax savings interest, and the rules vary widely.

Most states tax savings interest as ordinary income, explore their state income tax rate on top of federal tax. A few states — including Pennsylvania, Illinois, and Mississippi — do not tax interest income at all. Others exempt interest only if you are over a certain age, usually 65. A handful of states tax it but allow a small deduction or exemption.

You will need to check your state's rules or consult a tax resource specific to your state. The amount of state tax can be significant, especially in high-tax states like California or New York.

When you report the interest on your return

You report savings interest on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest and dividends combined for the year. If you have less than that, you can report it directly on Form 1040, line 2b.

The form asks for the total interest from all sources — savings accounts, CDs, bonds, and any other interest-bearing accounts. Add up all your 1099-INTs and any interest that was not reported on a form, then enter the total.

You file this with your annual tax return by April 15 (or the next business day if April 15 falls on a weekend). If you file early, you can include the interest as soon as you receive your 1099-INT from the bank.

How high-yield accounts affect your taxes

A high-yield savings account pays more interest than a traditional savings account — sometimes 4% or higher, depending on the current rate environment. That higher interest means higher taxable income.

If you have $10,000 in a high-yield account earning 4.5%, you earn $450 in interest per year. At a 22% federal tax rate, that costs you $99 in federal tax alone. State tax would add to that. The after-tax return is lower than the advertised rate.

This does not make high-yield accounts a bad choice — they still beat traditional savings accounts after tax — but it is worth factoring in when you compare rates. A 4.5% rate becomes roughly 3.5% after a 22% federal tax hit, before state taxes.

Interest from CDs and money market accounts

Certificates of deposit and money market accounts work the same way as savings accounts for tax purposes. The interest is ordinary income, reported on Form 1099-INT, and taxed at your marginal rate.

With a CD, the bank reports the interest in the year it is paid to you, not the year the CD matures. If you buy a one-year CD on December 1 and it matures on November 30 the next year, the interest is taxable in the year you receive it, not the year you bought the CD.

Money market accounts are treated identically to savings accounts — the interest is taxable in the year earned.

Frequently Asked Questions

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

Yes. The $10 threshold for receiving a 1099-INT is a reporting requirement, not a tax exemption. Any interest you earn is technically taxable income. If you earned $5 in interest and did not receive a 1099-INT, you still report it on your return.

What if I earned interest in multiple accounts?

Add up all the interest from all your accounts — savings, CDs, money market, everything — and report the total on your tax return. You will receive a separate 1099-INT from each bank, so gather all of them before you file.

Can I deduct any expenses related to my savings account?

No. Interest income has no deductible expenses. You cannot reduce your taxable interest by claiming account fees or other costs. You report the full interest amount the bank paid you.

Does moving money between my own accounts affect the tax?

No. Transferring money from checking to savings, or between savings accounts at different banks, is not a taxable event. Only the interest the bank pays you is taxable.

What happens if the bank made an error on my 1099-INT?

Contact the bank and ask them to issue a corrected Form 1099-INT (marked as a correction). Once you receive it, you can file an amended return if you already filed, or include the corrected amount when you file. Keep records of your communication with the bank.