Interest from your savings account is taxable income, and you report it on your federal tax return using the interest statements your bank sends you

Your bank will send you a Form 1099-INT each January showing how much interest you earned during the previous year. This form lists the total interest paid to you, and you use that number to report the income on your tax return. The IRS receives a copy of the same form, so the amount you report should match what the bank reported.

You do not pay tax on the interest separately or at the time you earn it. Instead, you include the interest income when you file your annual tax return, and the tax you owe is calculated as part of your overall income for that year. How much tax you actually pay depends on your total income and your tax bracket.

Key Takeaways

  • Your bank sends Form 1099-INT by January 31 each year, showing all interest earned in the previous calendar year.
  • You report this interest income on Schedule 1 (Form 1040) or on your tax return's interest and dividend section, depending on the form you use.
  • Interest is taxed as ordinary income at your regular tax rate, not at a special capital gains rate.
  • If you earned less than $10 in interest, your bank may not send a Form 1099-INT, but you still owe tax on that interest if you file a return.
  • You can reduce your tax burden by moving money to tax-advantaged accounts like IRAs or 529 plans, where interest grows without annual tax.

When and how your bank reports interest to the IRS

Banks and credit unions report interest paid to you on Form 1099-INT, which they mail or make available electronically by January 31 each year. This form covers all interest earned during the calendar year (January 1 through December 31). If you have multiple savings accounts, CDs, or money market accounts at the same institution, the bank typically combines the interest from all of them into one Form 1099-INT.

If you have accounts at different banks, you will receive a separate Form 1099-INT from each one. The IRS also receives copies of these forms, which is how they know to match your reported income against what the banks reported. If your reported interest does not match the Form 1099-INT, the IRS will flag it during processing.

Some banks allow you to view your Form 1099-INT online through your account portal before the physical copy arrives. If you do not receive a Form 1099-INT by early February, contact your bank to request it or ask if it is available online.

Where to report interest income on your tax return

The location where you report interest depends on which tax form you file. If you use Form 1040 (the standard individual income tax return), you report interest on Schedule 1, Part I, Line 8 (labeled "Interest"). You then transfer the total from Schedule 1 to the main Form 1040.

If you use tax software, the program will ask you directly about interest income and place it in the correct location automatically. You straightforward enter the amount shown on your Form 1099-INT, and the software handles the rest. Many people who file straightforward returns use this method because it reduces the chance of errors.

If you file a paper return, write the total interest from all your Form 1099-INT documents on the interest line of Schedule 1, then transfer it to Form 1040. Keep copies of your Form 1099-INT documents with your tax records for at least three years in case the IRS asks questions.

How interest income affects your tax bill

Interest is taxed as ordinary income, meaning it is added to your wages, self-employment income, and any other income you earned that year. Your total income then determines which tax bracket you fall into, and that bracket determines your tax rate.

For example, if you earned $50,000 in wages and $500 in savings account interest, your taxable income is $50,500. You pay tax on the full $50,500 at whatever rate applies to your income level. The interest does not get a lower rate just because it came from savings rather than work.

The amount of tax you owe on the interest depends entirely on your tax bracket. Someone in the 12% bracket pays 12 cents in federal tax for every dollar of interest. Someone in the 22% bracket pays 22 cents per dollar. This is why the same $500 in interest can result in different tax bills for different people.

Interest below the reporting threshold

Banks are not required to send a Form 1099-INT if the interest paid is less than $10 for the year. However, you still owe tax on that interest even if you do not receive a form. If you earned $8 in interest and your bank did not send a Form 1099-INT, you should still report that $8 on your tax return.

The IRS does not have a record of interest below $10 because the bank did not report it, but that does not mean you can skip reporting it. If you file a return and your income is otherwise low enough to require one, include all interest you earned, regardless of whether you received a form.

Keep your own records of interest earned by checking your account statements. Most online banking platforms show interest deposits clearly, and you can add them up yourself if you want to verify the amount before filing.

Reducing tax on savings account interest

The most direct way to reduce tax on interest is to move money into tax-advantaged retirement accounts like a traditional IRA or a Roth IRA. Interest earned inside these accounts is not taxed each year. In a traditional IRA, the interest is not taxed until you withdraw the money in retirement. In a Roth IRA, the interest is never taxed at all.

If you have children or grandchildren, a 529 education savings plan allows interest to grow tax-free as long as the money is used for education expenses. Some states also offer tax deductions for contributions to their 529 plans, which reduces your taxable income in the year you contribute.

Another option is a Health Savings Account (HSA) if you have a high-deductible health insurance plan. Interest earned in an HSA is not taxed, and you can withdraw the money tax-free for medical expenses. If you withdraw for non-medical reasons after age 65, you pay tax on the withdrawal but not on the interest itself.

For money you need to keep in a regular savings account, there is no way to avoid the tax on interest. You can only report it accurately on your return and pay what you owe.

State and local taxes on interest income

In addition to federal tax, most states tax interest income at the state income tax rate. A few states do not have income tax at all (including Florida, Texas, and Wyoming), so residents of those states pay federal tax on interest but no state tax.

States that do tax interest typically tax it the same way the federal government does: as ordinary income at your state tax rate. Some states offer exemptions for interest earned in certain retirement accounts or education savings plans, but the rules vary by state. Check your state's tax agency website or ask a tax preparer about your state's specific rules.

If you live in a state with income tax and earn interest, you will report it on both your federal return and your state return. The amount is the same on both; you are not reporting different numbers to different agencies.

Frequently Asked Questions

Do I have to file a tax return if I only earned interest income?

It depends on how much interest you earned and your age. For 2024, if you are under 65 and your only income is interest, you generally must file if your interest exceeded $1,300. If you are 65 or older, the threshold is higher. Check the IRS website or use their interactive tool to determine whether you must file based on your specific situation.

What if the Form 1099-INT my bank sent has the wrong amount?

Contact your bank when ready and ask them to issue a corrected Form 1099-INT. They will send you a corrected form and also send a corrected copy to the IRS. Do not file your tax return until you have the corrected form, because filing with the wrong amount could trigger an IRS notice later.

Can I deduct any expenses against my interest income?

No. Interest income is reported in full, and you cannot deduct expenses like account fees or investment advisory fees against it. However, some investment-related expenses may be deductible in other ways depending on your situation. Consult a tax professional if you have significant investment expenses.

Do I report interest from a joint savings account differently?

If the account is jointly owned, the bank will report the full interest amount on a Form 1099-INT. You and the other owner must decide how to split the income for tax purposes. If you own it 50-50, you each report 50% of the interest. Keep documentation of your agreement in case the IRS asks.

What happens if I do not report interest income on my tax return?

The IRS will eventually notice because they receive a copy of the Form 1099-INT from your bank. They will send you a notice showing the unreported income and calculate the tax you owe plus penalties and interest. It is far simpler and cheaper to report the interest correctly when you file.