Interest income is taxable, and the bank reports it to the IRS

Yes, you owe federal income tax on the interest your savings account earns. The IRS treats it as ordinary income, taxed at your regular income tax rate — not at a lower capital gains rate. If you earn $50 in interest over a year, that $50 gets added to your other income when you file your tax return.

Your bank tracks this interest and reports it to both you and the IRS on a Form 1099-INT by January 31 each year. The form shows exactly how much interest you earned in the previous calendar year. You then report that same amount on your federal tax return, usually on Schedule 1 (Form 1040) or directly on the 1040 itself, depending on your filing situation.

The threshold for receiving a 1099-INT varies by bank, but many institutions send one if you earned $10 or more in interest during the year. Even if your bank does not send you a form, you still owe tax on the interest — you have to report it based on your own records.

Key Takeaways

  • Interest earned in a savings account is taxed as ordinary income at your federal tax rate, whether that rate is 10%, 22%, 24%, or higher.
  • Your bank sends you a Form 1099-INT by January 31 showing the interest you earned, and you report that amount on your federal 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.
  • If you earned less than the bank's reporting threshold (often $10), you still owe tax on the interest even without a 1099-INT form.

How the tax rate on interest works

Your savings account interest is taxed at your marginal tax rate — the rate that applies to your highest dollar of income. If you are in the 22% federal tax bracket, every dollar of interest you earn is taxed at 22%. If you are in the 12% bracket, it is 12%.

This is different from how long-term capital gains work (which have their own lower rates). Interest is treated as regular income, the same way wages or self-employment income are treated. The IRS does not distinguish between money you earned by working and money your savings account earned by sitting in the bank.

Your marginal rate depends on your total income for the year and your filing status. A single filer in 2024 enters the 22% bracket at $11,601 of taxable income. A married couple filing jointly enters it at $23,201. If your interest pushes you into a higher bracket, that interest is taxed at the higher rate.

State and local taxes on savings interest

Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. If your state has a 5% income tax and you earn $100 in interest, you owe $5 to the state on top of your federal tax.

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 only interest and dividend income, not wages. If you live in one of these states, you owe federal tax on your interest but no state tax.

Some cities also tax income. New York City, for example, taxes residents on interest at a rate that varies with income. Check your state and local tax authority websites to understand what applies where you live.

When you report the interest on your tax return

You report interest income on your federal return using the Form 1040 or Schedule 1. The exact line depends on your total interest for the year. If you have less than $1,500 in interest and no other investment income, you report it directly on line 8 of the 1040. If you have more than $1,500 in interest or other investment income, you use Schedule B (Form 1040) to list each account and then transfer the total to the 1040.

You file your return by April 15 of the year following the one in which you earned the interest. So interest you earned in 2024 gets reported on the return you file in early 2025. Your bank sends you the 1099-INT by January 31, giving you time to gather the information before you file.

If you file electronically, most tax software will walk you through entering the interest amount. If you file by hand, write the total on the appropriate line and attach any 1099-INT forms your bank sent you.

What happens if you do not report the interest

The IRS receives a copy of every 1099-INT your bank sends you. If you do not report the interest on your return, the IRS will notice the discrepancy when it matches your return against the forms it received. This can trigger a notice asking you to explain the difference or pay the tax you owe plus penalties and interest.

Even small amounts matter. If you earned $47 in interest and did not report it, and the IRS catches it, you will owe tax on the $47 plus a penalty (usually 20% of the unpaid tax) plus interest on both amounts, compounded daily. It is far cheaper to report it in the first place.

If you genuinely did not receive a 1099-INT and your bank did not send one because you earned below their threshold, you still have to report the interest based on your own bank statements. Keep records of your account statements showing the interest posted each month.

Strategies to reduce interest income tax

You cannot avoid the tax, but you can reduce the amount of interest you earn and therefore the amount you owe tax on. High-yield savings accounts earn more interest than traditional savings accounts, but that higher interest is also fully taxable. A traditional savings account earning 0.01% will generate less taxable interest than a high-yield account earning 4.5%, but the tax difference is the trade-off for earning more money overall.

Some people use tax-advantaged accounts to hold savings. Money in a traditional IRA or 401(k) earns interest that is not taxed until you withdraw it in retirement. Money in a Roth IRA or Roth 401(k) earns interest that is never taxed, as long as you follow the withdrawal rules. A 529 college savings plan also grows tax-free if the money is used for education expenses. These accounts have contribution limits and withdrawal restrictions, so they work best as part of a longer-term savings plan, not for emergency funds.

If you have a very large savings balance, you might split it across multiple banks to keep each account below the 1099-INT reporting threshold. This does not reduce your tax — you still owe tax on all the interest — but it does reduce paperwork. Most people find this approach not worth the hassle.

Interest from different account types

All interest is taxable regardless of the account type. A savings account, money market account, certificate of deposit (CD), and interest-bearing checking account all generate taxable interest. If you have a CD that matures and pays you interest, that interest is taxable in the year you receive it or the year it is credited to your account, depending on the bank's terms.

Some CDs pay interest annually, others monthly or quarterly. The timing does not change the tax — you report all interest earned in a calendar year on the return you file the following year. If a CD matures in December and credits interest to your account in December, you report that interest on the return you file the next April, even though you received the money in December.

Interest from bonds, bond funds, and Treasury securities is also taxable, though the rules vary slightly. Treasury interest is exempt from state and local tax but not federal tax. Bond funds report interest on a 1099-INT just like savings accounts do.

Frequently Asked Questions

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

Yes. The $10 threshold is when banks must send you a 1099-INT form, not when you must report the interest. If you earned $5 in interest and your bank did not send a form, you still report the $5 on your tax return based on your bank statements. The IRS expects you to report all interest income regardless of amount.

What if I earned interest in multiple accounts at different banks?

Add up all the interest from all your accounts and report the total on your return. If the total is over $1,500, use Schedule B to list each account separately. Each bank sends you a 1099-INT for its own account, so gather all the forms and add them together.

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

No. You report the full interest amount as income, then you pay tax on it. You cannot reduce the interest by the amount of tax you owe. The tax is calculated based on the interest, not the other way around.

Is interest taxed differently if it is reinvested rather than withdrawn?

No. Whether your bank automatically reinvests the interest into your account or you withdraw it, you owe tax on it in the year it is earned or credited. The tax does not depend on what you do with the money afterward.

What if my savings account is in a child's name?

The child owes tax on the interest at their own tax rate, which is usually lower than an adult's. The child (or their parent, if they are a minor) reports the interest on the child's tax return. Some interest earned by a dependent child may be taxable to the parent instead under "kiddie tax" rules, depending on the child's age and the amount of income.