Savings account interest counts as ordinary income on your federal 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 salary — you owe federal income tax on the full amount. Your tax rate depends on your overall income and filing status, not on the size of the interest payment.

The bank reports this interest to you and to the IRS on a Form 1099-INT each January. You then report it on your tax return. If you earned $10 in interest, you report $10. If you earned $500, you report $500. There is no threshold below which interest becomes tax-free.

Most savings accounts earn so little interest that the tax owed is small. But the obligation exists regardless. A high-yield savings account earning 4 or 5 percent annually will generate more interest — and more tax — than a traditional savings account earning 0.01 percent.

Key Takeaways

  • All savings account interest is taxable federal income, reported on Form 1099-INT by your bank in January.
  • You report the interest on your tax return at your ordinary income tax rate, which ranges from 10 percent to 37 percent depending on your total income.
  • If you earned less than $10 in interest, your bank may not send a Form 1099-INT, but you still owe tax on it if you file a return.
  • Some states tax savings interest; others do not — check your state's rules separately.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw the money, but interest in a regular savings account is taxed every year.

How the IRS knows about your interest income

Your bank tracks every cent of interest it pays you. At the end of the calendar year, it sends you a Form 1099-INT showing the total interest earned in that account during the year. The bank sends a copy to the IRS at the same time.

The IRS matches the 1099-INT it receives from the bank against the income you report on your tax return. If you report less interest than the bank reported, or if you do not report the interest at all, the IRS will notice the discrepancy. This is one of the most straightforward audits to trigger because the numbers come from a third party the IRS already trusts.

If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add all of them together when you report your total interest income.

When your bank does not send a Form 1099-INT

Banks are required to send a Form 1099-INT only if the interest earned reaches $10 or more during the calendar year. If you earned $8.50 in interest, your bank will not send you a form.

You are still responsible for reporting that $8.50 on your tax return if you file one. The IRS expects you to keep your own records of interest income below the $10 threshold. In practice, this rarely triggers an audit because the amount is so small, but the tax obligation exists.

If you have multiple accounts and the total interest across all of them reaches $10, even if no single account hits that threshold, you still report the combined amount.

Your tax rate on interest depends on your total income

Interest income is taxed at your marginal tax rate — the rate that applies to the last dollar of income you earn. If you are in the 22 percent federal tax bracket, you owe 22 percent tax on your interest. If you are in the 12 percent bracket, you owe 12 percent.

The federal tax brackets for 2024 range from 10 percent to 37 percent. Your bracket depends on your filing status (single, married filing jointly, head of household) and your total taxable income. Interest income pushes your total income higher, which can move you into a higher bracket if you are near the edge.

Example: You earn $50,000 in wages and $500 in savings interest. Your total taxable income is $50,500. If you are single, that $500 in interest is taxed at your marginal rate for that income level. You do not pay a separate, higher rate on the interest itself — it is straightforward added to your other income and taxed at whatever rate applies to that combined total.

State income tax on savings interest

Most states that have an income tax also tax savings account interest. The state rate is usually lower than the federal rate — typically 3 to 6 percent — but it stacks on top of federal tax.

A handful of states do not tax interest income at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe federal tax on your interest but no state tax.

Some states tax interest but exempt it below a certain threshold. For example, a state might not tax interest if you earned less than $100 in a year. Check your state's tax authority website or your state income tax instructions to see how interest is treated where you live.

Interest in tax-advantaged accounts is handled differently

Interest earned inside a traditional IRA or 401(k) is not taxed in the year it is earned. The interest compounds tax-free until you withdraw the money in retirement. At that point, you pay income tax on the entire withdrawal, including all the accumulated interest.

Interest in a Roth IRA is never taxed — not when earned, not when withdrawn. This is one of the main advantages of a Roth account, especially if you expect to earn significant interest over a long time horizon.

Interest in a regular taxable savings account, by contrast, is taxed every single year, even if you do not touch the money. This is why high-yield savings accounts can be less efficient than retirement accounts for long-term saving, despite their higher interest rates.

How to report interest on your tax return

You report savings interest on Schedule 1 (Form 1040), which is part of the standard federal income tax return. The interest goes on the line labeled "Interest" under income. If you use tax software, it will ask you for the amount from your Form 1099-INT and fill in the correct line automatically.

If you received a Form 1099-INT from your bank, use the amount shown in Box 1 of that form. If you have multiple 1099-INTs, add them all together and report the total. If you earned interest below the $10 threshold and did not receive a form, you still report it — use your bank statements as your record.

Interest income is added to your other income to calculate your total taxable income. It does not get a separate deduction or special treatment — it is ordinary income, taxed at your regular rate.

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 Form 1099-INT. You are responsible for reporting all interest income on your tax return, regardless of the amount. Keep your bank statements as proof if you earned less than $10.

Can I deduct the taxes I paid on interest from my interest income?

No. Interest is reported as gross income. You cannot reduce it by the taxes you owe on it. However, if you paid estimated taxes or had taxes withheld, you claim those as credits on your return, which reduces your overall tax bill.

What if I moved money between accounts during the year — do I get taxed twice?

No. Each bank reports only the interest earned in its own account. Moving money from one account to another does not create additional interest or additional tax. You are taxed only on the interest actually earned, regardless of how many times you move the principal.

Does interest from a money market account get taxed the same way as a savings account?

Yes. Money market accounts are treated identically to savings accounts for tax purposes. The interest is reported on Form 1099-INT and taxed as ordinary income at your marginal rate.

If I earned interest but did not receive a 1099-INT, do I still owe tax?

Yes. If your bank did not send a form because the interest was below $10, you still report it on your return. If your bank should have sent a form but did not, contact the bank and request a corrected form. Do not skip reporting interest just because you did not receive a form.