Savings account interest is taxed as ordinary income at your federal tax rate, plus any state and local income tax that applies where you live

The interest your savings account earns is not a special category on your tax return. The IRS treats it the same way it treats wages or salary — as ordinary income. That means you pay federal income tax on it at whatever rate bracket you fall into, which ranges from 10% to 37% depending on your total income for the year. If you live in a state with income tax, you also pay that on the interest. Some cities tax it too.

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 report that number on your tax return, and the IRS matches it to what your bank reported. You cannot avoid reporting it just because the amount is small.

The tax is owed on the interest itself, not on your account balance. If you have $10,000 in savings earning 4% annual interest, you owe tax on the $400 in interest, not on the $10,000. The interest is added to your account, but the tax obligation is separate.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax bracket rate, which ranges from 10% to 37% depending on your total yearly income.
  • You must report interest of $10 or more on your tax return using the Form 1099-INT your bank sends you in January.
  • State and local income taxes also explore to savings interest in most places, adding to your total tax burden on that money.
  • The tax is calculated on the interest earned, not on your account balance, so a $10,000 account earning 4% interest means you owe tax on $400, not $10,000.

How your tax bracket determines what you actually pay

Your federal tax rate on savings interest depends on your total income for the year, not just the interest itself. If you earn $35,000 in wages and $500 in interest, your interest is taxed at whatever bracket your combined $35,500 puts you in. For 2024, that combined income would put a single filer in the 12% bracket, meaning roughly $60 of that $500 interest goes to federal tax.

The brackets shift each year and differ based on whether you file as single, married filing jointly, head of household, or another status. A married couple filing jointly has higher income thresholds before moving to the next bracket, so the same $500 in interest might be taxed at 10% instead of 12%. You can find the current year's brackets on the IRS website or on your tax software.

This is why the actual tax you owe on interest varies so much from person to person. Someone in the 37% bracket pays nearly four times the federal tax on the same interest amount as someone in the 10% bracket.

State and local taxes on savings interest

Most states with an income tax tax savings interest the same way the federal government does — as ordinary income at your state rate. State rates range from roughly 3% to over 13% depending on where you live. A few states do not tax interest income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. New Hampshire and Tennessee tax interest and dividends but not wages.

Some cities also tax income, including interest. New York City, for example, taxes residents on interest at rates up to 3.876% on top of state and federal tax. If you live in a city with an income tax, check your local tax authority's website or ask a tax preparer whether savings interest is included.

The total tax on interest can add up quickly. Someone in California earning $500 in interest might owe roughly $120 in federal tax (at 24%) plus $52 in state tax (at 9.3%), for a combined $172 — more than one-third of the interest earned.

When you receive the Form 1099-INT and what to do with it

Your bank mails or emails Form 1099-INT by January 31 each year for any interest paid during the previous calendar year. The form shows the account number, the total interest, and sometimes a breakdown by account if you have multiple savings accounts at the same bank. Keep this form with your tax documents.

When you file your tax return, you report the total interest from all your 1099-INT forms on Schedule B (Interest and Ordinary Dividends) if the total is over $1,500, or directly on Form 1040 if it is $1,500 or less. Your tax software will walk you through where to enter it. The IRS receives a copy of your 1099-INT from your bank, so the numbers must match what you report.

If you did not receive a 1099-INT but earned interest, contact your bank. They may have sent it to an old address, or they may not have your correct tax ID. You still owe tax on the interest even if you do not receive the form.

Interest earned in a high-yield savings account or money market account

High-yield savings accounts and money market accounts earn more interest than traditional savings accounts — sometimes 4% to 5% annually — but the tax treatment is identical. All the interest is taxed as ordinary income. The higher rate just means you owe tax on a larger amount. A $10,000 balance in a 5% high-yield account generates $500 in taxable interest, compared to $100 in a 1% traditional account.

This is why the real return on your savings is lower than the advertised rate. If you earn $500 in interest and owe $120 in combined federal and state tax, your actual after-tax return is $380, or 3.8% on a $10,000 balance — not the full 5% the bank advertised.

Tax-advantaged accounts that shield savings interest from tax

Certain accounts let you earn interest without paying tax on it, or let you defer the tax until later. A Roth IRA or Roth 401(k) lets you earn interest tax-free as long as you follow the withdrawal rules. A traditional IRA or 401(k) defers tax until you withdraw the money in retirement. A 529 college savings plan lets interest grow tax-free if you use it for education expenses.

These accounts have contribution limits and rules about when you can withdraw without penalty. A Roth IRA, for example, limits you to $7,000 per year in contributions (for 2024) and requires you to be at least 59½ to withdraw earnings tax-free. But if you have money you will not need for years, moving it into one of these accounts can save you significant tax on the interest it earns.

A regular savings account has no contribution limit and no withdrawal restrictions, so it is better for money you might need soon. The trade-off is that you pay tax on the interest every year.

Frequently Asked Questions

Do I have to pay tax on savings interest if the amount is very small?

Yes. The IRS requires you to report all interest income on your tax return, even if it is $1. Your bank only sends a Form 1099-INT if the interest is $10 or more, but you still owe tax on smaller amounts if you earned them. Keep track of all interest statements from your bank.

What if I have savings accounts at multiple banks?

Each bank sends you a separate 1099-INT for interest paid by that bank. You add up all the interest from all your 1099-INT forms and report the total on your tax return. The IRS receives copies from each bank, so the total must match what you report.

Can I deduct the tax I pay on savings interest?

No. Interest income is taxed, but the tax itself is not deductible. You cannot reduce your taxable income by the amount of tax you owe on the interest. The interest is added to your total income, and then tax is calculated on that higher total.

Is the interest taxed the year I earn it or the year I withdraw it?

Interest is taxed in the year you earn it, even if you leave it in the account and do not withdraw it. The bank adds the interest to your balance, and you owe tax on it that same tax year. This is different from some investment accounts where tax is deferred until you sell.

What happens if my interest income pushes me into a higher tax bracket?

Your interest is added to your other income, and your total income determines your tax bracket. If $500 in interest pushes you from the 12% bracket into the 22% bracket, the interest is taxed at 22%, not 12%. This is one reason high earners sometimes see a larger tax bill from interest than lower earners do.