You owe federal income tax on interest your savings account earns

Yes. Any interest your bank pays you counts as income to the IRS, and you report it on your federal tax return the same way you report wages or other money you receive. The bank will send you a form called a 1099-INT (Interest Income) if you earned $10 or more in interest during the year, though you owe tax on any amount, even if you don't receive the form.

The tax rate you pay depends on your overall income and tax bracket — the same brackets that explore to your salary. If you're in the 22% tax bracket, you don't pay 22% on the interest; instead, the interest is added to your other income, and you pay tax on the combined total at whatever rate applies to that total. For most people with savings accounts, the interest earned is small enough that it doesn't push them into a higher bracket.

Some states also tax interest income. Whether you owe state tax depends on which state you live in and whether that state has an income tax. A few states don't tax interest at all, while others tax it the same way the federal government does.

Key Takeaways

  • The IRS treats savings account interest as taxable income, and you report it on your federal tax return each year.
  • Your bank sends you a 1099-INT form if you earn $10 or more in interest, but you owe tax on any amount.
  • The tax rate you pay on interest is determined by your total income for the year, not a flat rate on the interest alone.
  • Some states tax interest income and some don't, so check your state's rules or ask your tax preparer.
  • High-yield savings accounts earn more interest, which means you'll owe more tax, but the account is still worth using if the interest rate is significantly higher than a regular savings account.

How the 1099-INT form works

Your bank is required to report interest to the IRS if you earned $10 or more in a calendar year. The bank sends you a copy of the 1099-INT and files a copy with the IRS. You receive it by January 31 of the following year — so interest you earn in 2024 shows up on a 1099-INT you get in January 2025.

If you have multiple savings accounts at different banks, you'll receive a separate 1099-INT from each bank that paid you $10 or more. When you file your tax return, you add up all the interest from all your accounts and report the total on your return.

Even if you don't receive a 1099-INT because your interest was under $10, you still owe tax on that interest. You report it yourself on your return. The form is just a convenience — it's not what creates the tax obligation.

What happens if you don't report the interest

The IRS receives a copy of every 1099-INT your bank files. If you don't report the interest on your return, the IRS will notice the discrepancy between what you reported and what the bank reported. This can trigger a notice asking you to explain the difference, or the IRS may straightforward add the unreported interest to your income and send you a bill for the tax owed plus penalties and interest.

The penalty for not reporting income is typically 20% of the unpaid tax, on top of the tax itself. If the IRS determines the underreporting was intentional, the penalty can be higher. It's much simpler to report the interest when you file.

How interest affects your tax bracket and refund

Interest income is added to your other income — wages, self-employment income, investment gains, and anything else you report. The total determines which tax bracket you fall into and how much tax you owe overall.

If you're close to the edge of a tax bracket, a large amount of interest could push you into a higher bracket. For example, if your wages are $45,000 and you earn $2,000 in interest, your taxable income is $47,000. However, most people with savings accounts earn small amounts of interest that don't meaningfully change their tax situation.

Interest can also affect whether you're may have access to to certain tax deductions or credits. Some credits have income limits, and adding interest income could reduce or eliminate your may be able to access. If you claim the Earned Income Tax Credit (EITC) or the Child Tax Credit, for instance, interest counts toward the income limit.

State taxes on savings account interest

Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividend income, but many accounts are exempt). If you live in one of these states, you don't owe state tax on your interest.

Every other state taxes interest as income. Some states follow the federal system closely, while others have different tax rates or rules. A few states offer small exemptions for interest earned by retirees or people over a certain age, but these are uncommon.

If you live in a state with income tax, your state tax return will ask you to report interest income. Some states use the same 1099-INT your bank sends you; others require you to report it separately. Your tax software or preparer will guide you through this.

Interest from different account types

Regular savings accounts, money market accounts, and certificates of deposit (CDs) all generate taxable interest. High-yield savings accounts earn more interest, which means you'll owe more tax, but the higher rate usually makes them worth using anyway — you're earning more even after paying the tax.

Interest from retirement accounts like traditional IRAs and 401(k)s is not taxed annually. Instead, you pay tax when you withdraw the money in retirement. Interest from Roth IRAs and Roth 401(k)s is never taxed, even when you withdraw it, as long as you follow the rules for those accounts.

If you have a regular (taxable) savings account and a retirement account, only the interest from the regular account triggers a 1099-INT and counts as current-year income.

Keeping records for tax time

Save your 1099-INT forms and any statements from your bank that show interest earned. You don't need to send these forms to the IRS when you file — the IRS already has them — but you should keep them for your records in case the IRS asks questions later.

If you use tax software, it will walk you through entering the interest income. If you use a tax preparer, give them all your 1099-INT forms. If you prepare your return by hand, you'll report the interest on Schedule B (Interest and Ordinary Dividends) and then transfer the total to your main tax form.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether your bank sends you a 1099-INT form. You owe tax on any interest you earn, regardless of the amount. Report it on your return even if you don't receive the form.

Can I deduct the taxes I pay on savings interest?

No. Interest income is taxable, and you can't deduct the tax you pay on it. You report the interest as income and pay tax at your regular rate. There's no separate deduction for interest taxes.

What if my bank made a mistake on the 1099-INT?

Contact your bank and ask them to issue a corrected form (called a 1099-INT with "CORRECTED" marked on it). The bank will file the corrected version with the IRS and send you a copy. Report the corrected amount on your tax return.

Does interest from a joint savings account get split between account holders?

The bank reports the full interest amount on a single 1099-INT. You and the other account holder will need to decide how to split it for tax purposes — usually 50/50 if you own it equally, but you can split it differently if you agree. Each person reports their share on their own tax return.

Will high-yield savings interest push me into a higher tax bracket?

Possibly, but only if your total income is very close to a bracket boundary. For most people, even high-yield savings interest is small enough that it doesn't change their bracket. You can estimate your tax situation using a tax calculator or by talking to a tax preparer.