You pay federal income tax on the interest your savings account earns, but not on the money you deposit

The money you put into a savings account is not taxable — you already paid tax on that income when you earned it. What becomes taxable is the interest the bank pays you. The IRS treats savings account interest as ordinary income, which means it gets added to your other income and taxed at your regular rate.

Your bank reports this interest to you and to the IRS on a Form 1099-INT each January. 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 1099-INT, you still owe tax on all interest you earned — you have to report it yourself.

Some states also tax savings account interest as part of your state income tax, though a few states exempt it. The tax you owe depends on your total income for the year and your tax bracket, not on the size of your savings account.

Key Takeaways

  • Interest earned in a savings account is taxed as ordinary income at your federal tax rate, added to all your other income for the year.
  • Your bank sends you a Form 1099-INT in January if you earned interest above their reporting threshold, usually $10, but you owe tax on all interest regardless.
  • Most states tax savings account interest as part of state income tax, though a handful do not.
  • High-yield savings accounts earn more interest, which means you owe more tax on that interest — the trade-off is worth understanding before you move money.

How the IRS knows about your savings interest

Banks are required to report interest payments to both you and the IRS. In early January, your bank mails or emails you a Form 1099-INT showing the total interest you earned in the previous calendar year. The bank sends a copy to the IRS at the same time, so the IRS already knows how much interest you received before you file your tax return.

If you earned less than the bank's reporting threshold — often $10, but this varies — you may not receive a 1099-INT. That does not mean you are off the hook. You are still required to report all interest income on your tax return, even if you do not have a 1099-INT to show. The IRS cross-checks tax returns against the 1099-INTs it receives, so underreporting or omitting interest is a red flag.

Keep your own records of interest earned if your bank does not send a 1099-INT. You can usually find the interest amount in your account statements or by logging into your online banking portal and reviewing the transaction history for deposits labeled "interest" or "dividend."

What tax rate applies to your savings interest

Savings account interest is taxed at your marginal tax rate — the tax bracket you fall into based on your total income for the year. If you earn $50,000 in wages and your savings account earns $500 in interest, that $500 is added to the $50,000, and the combined $50,500 is what determines your tax bracket.

For 2024, federal tax brackets range from 10% to 37%, depending on your filing status and total income. A person in the 22% bracket pays 22% tax on the interest. A person in the 12% bracket pays 12%. The more income you have from other sources, the higher the rate you pay on your savings interest.

This is why high-yield savings accounts can be a trade-off: they pay more interest, but that higher interest pushes you into a higher tax bracket or increases the tax you owe in your current bracket. The interest is still worth earning in most cases, but it is not "information programs" — a portion goes to taxes.

State taxes on savings account interest

Most states tax savings account interest as part of your state income tax return. The state tax rate varies widely — from around 3% to over 13% depending on the state and your income level. If you live in a state with income tax, you will report your savings interest there as well as on your federal return.

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 savings interest but no state tax. Some other states tax interest only if it exceeds a certain threshold, so check your state's rules if you are unsure.

If you moved during the year or earned interest in multiple states, you may need to file returns in more than one state. Your bank's 1099-INT will show the total interest for the full year, but you will need to allocate it to the states where you lived when you earned it.

How to report savings interest on your tax return

On your federal return, you report savings account interest on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest and dividend income for the year. If you have less than $1,500, you can report it directly on Form 1040, line 2b, without filing Schedule B.

List each account separately on Schedule B if you have multiple savings accounts. Add up the total interest from all accounts and enter that figure on your Form 1040. The interest then flows into your adjusted gross income (AGI) and becomes part of your taxable income for the year.

For state taxes, follow your state's instructions for reporting interest income. Most states have a line on their income tax form where you enter total interest received. Some states use a separate schedule similar to the federal Schedule B.

When you might owe taxes even without a 1099-INT

If your savings account earned less than $10 in interest (or your bank's threshold), you will not receive a 1099-INT. You still owe tax on that interest. Report it on your tax return even though you do not have a form from the bank.

The same applies if you closed a savings account mid-year and the bank did not send you a 1099-INT because the interest fell below their threshold. You are responsible for tracking and reporting all interest, regardless of whether the bank reports it to the IRS.

If you have multiple savings accounts at different banks, each bank reports only the interest from its own account. You add them all together when you file your return. Keep copies of all 1099-INTs you receive so you can verify the total matches what you report.

The difference between savings interest and other types of income

Savings account interest is treated as ordinary income, the same as wages or salary. It is not capital gains, which can sometimes be taxed at lower rates. It is not a return of your principal — only the interest portion is taxable.

This matters because if you move money between accounts, you do not create a taxable event. Transferring $5,000 from one savings account to another is not taxable. Only the interest the money earns is taxable. Similarly, if you withdraw money from a savings account, you do not owe tax on the withdrawal itself — only on the interest that account generated while the money was there.

Money market accounts and certificates of deposit (CDs) are taxed the same way as savings accounts: the interest is taxable, but your principal is not.

Frequently Asked Questions

Do I have to pay taxes on money I transfer into my savings account?

No. You only pay tax on the interest the account earns, not on the money you deposit. You already paid tax on that money when you earned it as income. Transferring it between accounts does not create a new tax event.

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

You still owe tax on all interest you earned. Report it on your tax return using your account statements or online banking records to verify the amount. The IRS does not need a 1099-INT to require you to pay tax on interest income.

Can I avoid taxes by keeping my savings account balance low?

No. The tax is on the interest earned, not on the balance. A $10,000 account earning 4% interest owes tax on $400, regardless of the account size. The only way to owe less tax is to earn less interest, which means either keeping less money in savings or moving to an account with a lower rate.

Do I pay taxes on savings interest if I am a dependent?

Yes, but the rules are different. A dependent can usually earn up to a certain amount of unearned income (interest, dividends) before owing federal tax. For 2024, that threshold is $1,300. Above that, the dependent owes tax. Check the current year's rules or consult a tax professional if you are unsure whether a dependent's interest is taxable.

Is the interest from a high-yield savings account taxed differently?

No. High-yield savings accounts earn more interest, so you owe more tax on that interest, but the tax treatment is identical to a regular savings account. The interest is ordinary income taxed at your marginal rate, reported on a 1099-INT, and added to your other income on your tax return.