You owe federal income tax on interest your savings account earns, and most states tax it too
Any interest your bank pays you counts as taxable income. The IRS treats it the same way it treats wages or investment dividends — you report it on your tax return and pay tax at your ordinary income tax rate. There is no threshold below which interest becomes tax-free; even $5 in interest is technically taxable, though the IRS only requires you to report it if your total interest income crosses certain thresholds.
Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. That form goes to the IRS too, so they already know about the interest before you file. If you earned less than $10, you still owe tax on it — you just won't receive the form, and you have to report it yourself.
State income tax works the same way in most states. If your state has an income tax, interest is taxable there as well. A handful of states — including Pennsylvania, Illinois, and Mississippi — exempt interest and dividend income from state tax, but this is rare. Check your state's tax agency website to confirm whether your state taxes interest.
Key Takeaways
- You owe federal income tax on all savings account interest at your regular tax rate, regardless of the amount.
- Your bank sends Form 1099-INT to you and the IRS when interest reaches $10 or more in a calendar year.
- Most states tax savings interest the same way the federal government does, though a few states exempt it entirely.
- The tax you owe depends on your total income and tax bracket, not on how much interest you earned.
- You report interest income on your tax return even if you did not receive a Form 1099-INT.
How the IRS knows about your interest and when you must report it
Banks report interest to the IRS automatically through Form 1099-INT. If you earned $10 or more in interest during the calendar year, your bank mails you a copy by January 31 and sends another to the IRS. This happens whether you asked for it or not — it is a legal requirement for the bank.
If you earned less than $10, you will not receive a form, but you still owe tax on the interest. You report it yourself on your tax return under "Interest Income" on Schedule 1 (Form 1040). The IRS does not know the amount unless you tell them, but failing to report it is underreporting income, which can trigger an audit or penalty if discovered.
You report interest income for the year you earned it, not the year you withdraw the money. If interest posted to your account in December but you did not touch the account until January, you still report it on the previous year's return.
What tax rate applies to your interest income
Interest is taxed as ordinary income, which means it is taxed at the same rate as your salary or wages. If you are in the 22% federal tax bracket, interest is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%. The rate depends on your total income for the year, not on the source of the income.
This is different from long-term capital gains, which have their own lower tax rates. Interest is always ordinary income, even if you earned it in a high-yield savings account or money market account.
Your state tax rate (if your state taxes interest) is separate from your federal rate. A state with a 5% income tax will add 5% to what you owe federally. Some states have graduated rates like the federal system, so your state rate also depends on your total income.
When high-yield savings accounts change what you owe
High-yield savings accounts pay more interest than traditional savings accounts — sometimes 4% or higher, depending on the market. The higher the interest rate, the more you earn, and the more you owe in taxes. A $10,000 balance in a 4.5% high-yield account generates $450 in annual interest; a traditional savings account at 0.01% generates $1. Both are taxable, but the tax bill on $450 is much larger.
Some people move money to high-yield accounts specifically to earn more, but they forget to account for the tax impact. If you earn $1,000 in interest and you are in the 24% federal bracket plus a 5% state bracket, you owe $290 in taxes on that $1,000 — leaving you with $710 in actual after-tax gain. Plan accordingly if you are moving significant balances.
How to report interest on your tax return
If you received Form 1099-INT, the amount to report is in Box 1 (labeled "Interest Income"). You enter this amount on Schedule 1, line 1a, and then transfer it to your Form 1040. If you have multiple 1099-INT forms from different banks, add them together and report the total.
If you earned less than $10 and did not receive a form, you still enter the interest income on Schedule 1, line 1a. Keep your own records — a statement from your bank showing the interest posted is enough documentation.
If you are filing electronically, tax software will walk you through entering the 1099-INT information. If you are filing by hand, write the amount clearly and keep a copy of the form with your records for at least three years.
Tax-advantaged accounts that avoid interest taxation
Certain accounts let you earn interest without paying federal income tax on it. A Roth IRA or Roth 401(k) allows interest to grow tax-free as long as you follow withdrawal rules. A Health Savings Account (HSA) also grows interest tax-free if the money is used for may have access to medical expenses. A 529 education savings plan grows interest tax-free if used for education costs.
These accounts have contribution limits and withdrawal restrictions, so they are not a solution for all your savings. But if you are saving for retirement, education, or medical expenses, using these accounts instead of a regular savings account can save you significant tax over time.
Traditional IRAs and 401(k)s also defer taxation — you do not pay tax on interest while the money is in the account, but you pay tax when you withdraw it in retirement. This is different from Roth accounts, where withdrawals are tax-free.
What happens if you do not report interest income
The IRS receives a copy of every Form 1099-INT sent to you. If you do not report the interest on your tax return, the IRS will notice the discrepancy when they match your return against the forms they received. This triggers a notice asking you to explain the difference.
If the amount is small, you may straightforward owe the tax plus interest on the unpaid amount. If the IRS determines you intentionally failed to report income, you can face a penalty of 20% to 75% of the unpaid tax, depending on the circumstances. An audit is also possible, which can expand to other parts of your return.
Reporting the interest, even if you owe tax on it, is always safer than not reporting it. If you cannot pay the full tax bill when you file, the IRS has payment plans available.
Frequently Asked Questions
Do I owe taxes on interest if I earned less than $10?
Yes. The $10 threshold only determines whether your bank sends you a Form 1099-INT. You still owe tax on any interest you earned, and you must report it on your return. Keep your bank statements as proof of the amount.
Can I deduct the taxes I pay on interest from my interest income?
No. Interest income is reported as-is on your tax return. You do not deduct the taxes you owe from the interest itself. Your tax liability is calculated separately based on your total income and tax bracket.
What if I have interest from a joint account with my spouse?
The bank reports the full interest amount on a single Form 1099-INT. You and your spouse must decide how to split it based on your ownership agreement. If you own it 50/50, you each report half. Keep documentation of how you split it in case the IRS asks.
Does moving money between my own savings accounts create taxable interest?
No. Transferring money between accounts you own does not create income. Only the interest the bank pays you is taxable. Moving the principal around does not change that.
Are there any savings accounts where interest is not taxable?
Interest in regular savings accounts is always taxable. However, interest earned inside a Roth IRA, Roth 401(k), HSA, or 529 plan is not taxed federally (and usually not at the state level either), as long as you follow the account rules for withdrawals.