Yes, the interest your savings account earns is taxed as income

The money your bank pays you for keeping money in a savings account is called interest. That interest counts as income on your taxes, just like wages from a job do. You owe federal income tax on it, and depending on where you live, you may owe state or local income tax on it too.

The amount of interest you earn depends on the interest rate your bank offers and how much money you keep in the account. Even small amounts add up over time. If you earn $10 or more in interest during a calendar year, your bank will send you a tax form in January called a 1099-INT, and you will need to report that interest when you file your taxes.

This is different from the money you put into the account yourself — that is your own money and is not taxed. Only the interest the bank pays you is taxed.

Key Takeaways

  • Interest earned in a savings account is taxed as income at both the federal level and possibly at the state or local level where you live.
  • Your bank sends you a 1099-INT form if you earn $10 or more in interest during the year, and you must report this on your tax return.
  • The interest rate varies by bank and account type, so different savings accounts will generate different amounts of taxable interest.
  • You do not pay tax on the money you deposit yourself, only on the interest the bank pays you.

When your bank sends you a 1099-INT form

In late January or early February each year, your bank mails or emails you a 1099-INT form if you earned $10 or more in interest during the previous calendar year. This form shows exactly how much interest you earned. You receive one copy, and your bank sends another copy to the Internal Revenue Service (IRS), the federal tax agency.

You need this form to complete your tax return. If you use tax software or file with a tax preparer, you will enter the amount from the 1099-INT into the interest income section. If you lost your form or did not receive one, you can contact your bank and ask them to send it again or provide the interest amount.

If you earned less than $10 in interest, your bank may not send a 1099-INT, but you still owe tax on that interest. You can find the exact amount in your account statements or by logging into your online banking.

How much tax you owe on savings interest

The tax you owe depends on your total income for the year and your tax bracket — the percentage rate that applies to your income level. Someone earning $30,000 a year pays a different percentage on interest than someone earning $100,000 a year. The more income you have, the higher your tax rate usually is.

For example, if you earn $500 in interest and your federal tax bracket is 12 percent, you would owe roughly $60 in federal tax on that interest. But if your bracket is 22 percent, you would owe roughly $110. Your state or local tax, if you owe it, adds to this amount.

You do not calculate this yourself when you file your taxes. Tax software or a tax preparer uses your total income to determine your bracket and calculates what you owe. The key point is that more interest means more tax, and the exact amount depends on your overall income situation.

Why interest rates vary and what that means for your taxes

Banks offer different interest rates on savings accounts. Some accounts pay very little — sometimes less than 0.01 percent per year. Others, especially online banks and high-yield savings accounts, may pay 4 percent or higher. The higher the rate, the more interest you earn, and the more tax you owe on it.

A high-yield savings account might earn you $400 in interest on $10,000 in a year, while a traditional bank account might earn only $10 on the same amount. That $390 difference also means a difference in taxes owed. When you are choosing where to keep your savings, it is worth thinking about both the interest rate and the tax impact.

Some people move money to accounts with higher rates specifically because the extra interest outweighs the extra taxes. Others prefer to keep money in lower-rate accounts at their main bank for convenience. Understanding how interest and taxes work helps you make that choice.

Reporting interest on your tax return

When you file your federal tax return, you report interest income on Schedule 1 (Form 1040), which is part of the standard tax forms most people use. You enter the total interest from all your savings accounts, checking accounts, and other interest-bearing accounts in one line.

If you use tax software like TurboTax, H&R Block, or TaxAct, the software walks you through entering this information. If you file by hand or with a tax preparer, they will ask you for your 1099-INT forms and enter the amounts for you.

You must report all interest you earned, even if you did not receive a 1099-INT form because the amount was under $10. The IRS knows what your bank reported, so reporting the correct amount keeps your return accurate.

State and local taxes on savings interest

Most states tax interest income the same way the federal government does — as regular income. A few states do not tax interest at all. Your state tax depends on where you live and file your taxes, not where your bank is located.

If you live in a state with income tax, you will report your interest on your state tax return as well. Some cities also tax income. When you file, you report the same interest amount to both federal and state forms, and each level of government calculates its own tax based on its own rates.

If you are unsure whether your state taxes interest, you can check your state's tax agency website or ask a tax preparer. The amount is usually small enough that it does not change your decision about where to save, but it is good to know.

Frequently Asked Questions

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

Yes. Your bank may not send a 1099-INT if you earned less than $10, but you still owe tax on that interest. Check your account statements for the exact amount and report it on your tax return.

What if I have savings accounts at multiple banks?

Add up the interest from all your accounts and report the total on your tax return. Each bank sends its own 1099-INT, so you will have multiple forms to gather, but you enter one combined total in the interest income section.

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

No. You report the full interest amount your bank paid you. Fees you paid to the bank are not deductible against that interest on your federal return, though some states may allow it — check your state's rules.

Does a joint savings account change how interest is taxed?

If you own a joint account, the interest is split between the owners based on each person's ownership share. Your bank will issue separate 1099-INT forms to each owner, or one form showing the split. Each person reports their share on their own tax return.

What happens if I do not report the interest?

The IRS receives a copy of your 1099-INT from your bank. If you do not report it, the IRS will notice the mismatch and may send you a notice asking for the missing income or assessing additional tax and penalties. Reporting it when you file avoids this problem.