You owe federal income tax on interest your savings account earns, but only if that interest reaches a certain threshold

The IRS treats savings account interest as ordinary income. That means if your bank pays you $10 in interest over a year, that $10 is taxable income just like wages are. You report it on your federal tax return, and depending on your total income and filing status, you may owe tax on it.

The threshold that triggers a reporting requirement is $10 of interest or more in a calendar year. If your account earned less than $10, you do not have to report it. If it earned $10 or more, your bank will send you a Form 1099-INT by January 31 of the following year, and you must include that interest on your tax return.

Some states also tax savings interest, though the rules vary. A few states exempt interest income entirely; most tax it at the same rate as federal income tax. Check your state's tax authority website to learn what applies where you live.

Key Takeaways

  • Savings account interest is taxable as ordinary income on your federal return if it totals $10 or more in a calendar year.
  • Your bank reports interest of $10 or more on Form 1099-INT, which you receive by January 31 and must include when you file taxes.
  • Interest below $10 does not require reporting to the IRS, but you may still owe state tax depending on where you live.
  • The tax you owe depends on your total income and tax bracket, not on the interest amount alone.
  • High-yield savings accounts earn more interest, which means a higher tax bill, but the after-tax return is usually still better than traditional savings accounts.

How the IRS counts savings interest as income

Interest is added to your taxable income for the year it is earned, not the year you withdraw it. If your account earned $25 in interest during 2024, you report that $25 on your 2024 tax return, even if you leave the money in the account.

The tax you actually owe on that interest depends on your tax bracket. If you are in the 12% federal tax bracket, $25 in interest costs you about $3 in federal tax. If you are in the 22% bracket, it costs about $5.50. State tax, if your state has it, adds on top of that.

This matters most for high-yield savings accounts, which currently pay 4% to 5% annual interest. A $10,000 balance in a high-yield account might earn $400 to $500 per year—enough to push some people into a higher tax bracket or reduce tax credits they were counting on.

When your bank sends Form 1099-INT and what to do with it

If your savings account earned $10 or more in interest during the calendar year, your bank mails you a Form 1099-INT by January 31. This form shows the interest amount in Box 1. You receive a copy; the bank sends a copy to the IRS.

When you file your tax return, you report the amount from Box 1 of the 1099-INT on Schedule 1 (Form 1040), line 8b, or directly on your return depending on the tax software you use. If you use tax preparation software, it usually walks you through entering this information.

Keep the 1099-INT with your tax records for at least three years. If the IRS audits you, they will compare the interest you reported to what the bank reported, so the numbers must match.

Interest below $10 and whether you still have to report it

If your savings account earned less than $10 in interest, your bank does not send you a 1099-INT. You are not required to report it to the IRS. However, you are still legally required to report all income, including interest under $10, if you file a tax return.

In practice, most people do not report interest below $10 because the IRS does not receive a matching form from the bank. The risk of audit over a few dollars is very low. That said, the law technically requires you to report it.

If you are unsure whether to report small interest amounts, consult a tax professional or use IRS Publication 17, which covers what counts as taxable income.

State taxes on savings interest vary widely

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 only, not wages). If you live in one of these states, you owe no state tax on savings interest.

Most other states tax interest as ordinary income at their regular income tax rate. A few states offer partial exemptions—for example, some allow a small amount of interest income to be excluded, or tax it at a lower rate than wages.

Check your state's department of revenue website or ask a tax professional what your state's rules are. The federal 1099-INT does not change based on state law, so you may need to file a separate state return even if you owe no federal tax.

How high-yield savings accounts affect your tax bill

High-yield savings accounts pay significantly more interest than traditional savings accounts—often 4% to 5% annually, compared to 0.01% or less at many big banks. This higher interest means a higher tax bill, but the after-tax return is usually still better.

For example, $10,000 in a traditional savings account earning 0.01% generates $1 in interest and roughly $0.12 in federal tax (at the 12% bracket). The same $10,000 in a high-yield account earning 4.5% generates $450 in interest and roughly $54 in federal tax. You come out ahead by about $396 after tax.

If you are in a higher tax bracket or live in a state with high income tax, the tax bite is larger. But the math usually still favors high-yield accounts. Use an online calculator to compare the after-tax returns of different account types before you decide where to keep your money.

What happens if you do not report interest income

If your bank reports interest on a 1099-INT and you do not report it on your tax return, the IRS will eventually notice. Their computers match 1099 forms to tax returns automatically. If there is a mismatch, you receive a notice asking you to explain or pay the tax owed plus penalties and interest.

The penalty for failing to report income is usually 20% of the unpaid tax, plus interest that accrues daily. If the IRS determines the failure was intentional, the penalty can be higher. It is far cheaper to report the interest correctly the first time.

If you made an honest mistake and did not report interest in a prior year, you can file an amended return (Form 1040-X) for that year. The sooner you do this, the less interest accrues on the unpaid tax.

Frequently Asked Questions

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

Technically yes—all income must be reported. However, your bank does not send a 1099-INT for interest under $10, and the IRS does not receive a matching form. The practical risk of audit over a few dollars is very low, but the law requires you to report it if you file a return.

What if I have multiple savings accounts at different banks?

Each bank reports interest separately on its own 1099-INT. You add up all the interest from all your accounts and report the total on your tax return. If one account earned $6 and another earned $8, you report $14 total, and you should receive two 1099-INT forms.

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

No. You report the full interest amount shown on the 1099-INT. Fees you pay to the bank are not deductible against interest income. However, if a fee is large enough, it may be worth switching to a bank with lower or no fees.

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

Not automatically. The bank reports the full interest amount on a 1099-INT in the name and Social Security number of whoever is listed first on the account. You and the other owner must decide how to split the tax liability and report it correctly on your individual returns. Consult a tax professional if you are unsure how to handle this.

If I move money between savings accounts, do I owe tax on the transfer?

No. Moving money from one account to another is not a taxable event. You only owe tax on interest the account earns, not on deposits or transfers you make yourself.