Yes, you owe federal income tax on savings account interest

The interest your bank pays you counts as ordinary income. The IRS treats it the same way it treats wages or salary — you report it on your tax return and pay tax at your regular income tax rate. There is no special lower rate for interest income, and there is no threshold below which you can ignore it.

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 every cent of interest paid to you across all your accounts at that bank. You use this form to fill in the interest income section of your tax return.

If you earned less than $10 in interest, your bank does not have to send you a 1099-INT, but you still owe tax on that interest. You report it yourself using the information from your account statements.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your regular federal tax rate, with no special exemption or lower rate.
  • Your bank sends you a Form 1099-INT if you earned $10 or more in interest during the year, which you use to report the income on your tax return.
  • State and local income taxes also explore to savings interest in most states, so your total tax burden depends on where you live.
  • The amount of tax you owe depends on your total income for the year and your tax bracket, not on the interest amount alone.

How the 1099-INT form works and what it shows

The Form 1099-INT arrives by mail or email in January and shows the total interest paid to you during the previous calendar year. If you have multiple savings accounts at the same bank, the form combines all of them into one total. If you have accounts at different banks, each bank sends its own 1099-INT.

The form has several boxes. Box 1 shows the interest income you earned. Boxes 2 through 8 show other types of interest (U.S. savings bonds, early withdrawal penalties, and so on) — most savings account holders only need to look at Box 1.

You receive a copy to file with your tax return and a copy for your records. The IRS also receives a copy directly from the bank, so if you do not report the interest, the IRS will notice the mismatch between what the bank reported and what you claimed.

State and local taxes on savings interest

In addition to federal tax, most states tax savings interest as income. The rate depends on your state's income tax bracket and your total income for the year. A few states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not have a state income tax at all, so residents of those states owe only federal tax on interest.

Some states offer small exemptions for interest earned on certain types of savings accounts, but these are rare and usually explore only to specific accounts like college savings plans or retirement accounts. A regular savings account does not may have access to.

If you live in a city or county that has a local income tax (common in Ohio, Pennsylvania, Kentucky, and parts of other states), you may owe local tax on the interest as well. Check your local tax authority's website or your most recent local tax return to see whether this applies to you.

What tax rate applies to your interest income

Your interest is taxed at your marginal tax rate — the rate that applies to the last dollar of your income. If you earn $50,000 a year and are single, you are in the 22% federal tax bracket. If you earn $200,000, you are in the 32% bracket. The interest you earn gets added to your total income and taxed at whatever bracket you fall into.

This means the tax you owe on $100 in interest is not the same for everyone. A person in the 12% bracket pays $12 in federal tax on that $100. A person in the 35% bracket pays $35. Your state and local rates add on top of that.

If you are retired and living on a fixed income, even a small amount of interest can push you into a higher tax bracket. If you are working and earning a high salary, the interest barely moves the needle. The key is understanding where you fall in the tax brackets for your filing status and income level.

When you earn interest but do not receive a 1099-INT

If you earned less than $10 in interest during the year, your bank is not required to send you a 1099-INT. You still owe tax on that interest. You report it on your tax return using the interest shown on your monthly or year-end account statements.

Some banks also do not send a 1099-INT if the account is held in a trust or if the account holder is a business rather than an individual. In those cases, the bank may send the form to the trust or business instead. Check with your bank if you are unsure whether you should receive one.

If you have multiple accounts at the same bank and the total interest across all of them is less than $10, you still do not receive a 1099-INT, but you still report the interest. Add up the interest from all your statements and include the total on your return.

How high-yield savings accounts affect your tax bill

High-yield savings accounts pay significantly more interest than traditional savings accounts — sometimes 4% or higher, compared to 0.01% at a regular bank. This means you earn more interest, which means you owe more tax on that interest.

If you have $10,000 in a high-yield account earning 4.5% annually, you earn $450 in interest. At the 22% federal tax bracket, you owe $99 in federal tax on that interest alone. Add state and local taxes and the bill grows. The higher the interest rate, the more tax you owe — there is no tax advantage to high-yield accounts.

This does not mean high-yield accounts are a bad choice. The interest you earn is still yours to keep after taxes. But it is important to factor the tax cost into your decision about where to keep your savings.

Reporting interest on your tax return

On the federal level, you report interest income on Schedule 1 (Form 1040), which is part of your main tax return. You list the total interest from all your 1099-INT forms and any interest you earned but did not receive a 1099-INT for.

If your total interest income is $1,500 or less and you have no other investment income, you can report it directly on the main Form 1040 without filing Schedule 1. If you have more than $1,500 in interest or you have other investment income, you must use Schedule 1.

State and local tax returns have their own sections for interest income. Most state forms ask for the same total you reported to the IRS, though some states have different rules about what counts as taxable interest.

Frequently Asked Questions

Do I owe tax on interest if I did not withdraw the money?

Yes. The IRS taxes interest in the year it is earned, not in the year you withdraw it. If your bank paid you $50 in interest in 2024, you owe tax on that $50 in 2024, even if the money stayed in the account and you never touched it.

What if I earned interest but my bank did not send a 1099-INT?

Contact your bank and ask for the total interest earned on your account during the year. You can find this on your year-end statement or by asking customer service. Report that amount on your tax return even without a 1099-INT. The IRS knows the bank paid you interest, and you need to report it.

Can I deduct the taxes I pay on savings interest?

No. Interest income is taxed as ordinary income, and you cannot deduct the tax you owe on it. You report the gross interest amount (before any taxes) on your return, and the tax is calculated based on that amount.

Do I owe tax on interest earned in a joint account?

Yes, but how you split the tax depends on how the account is structured. If both owners contributed equally and both are responsible for the account, you typically each report half the interest. If one person owns the account and the other is just an authorized user, the owner reports all the interest. Check with your bank about how the account is registered.

What happens if I do not report interest income?

The IRS receives a copy of your 1099-INT directly from the bank. If you do not report the interest on your return, the IRS will notice the discrepancy and send you a notice asking for the missing tax plus penalties and interest charges. It is much simpler to report it correctly the first time.