The tax on your savings account depends on how much interest you earn

You do not pay tax on the money you put into a savings account — only on the interest the bank pays you. That interest is treated as income by the IRS, which means you report it on your tax return just like wages or other earnings. How much tax you owe depends on your total income for the year and what tax bracket you fall into.

The bank will send you a form called a 1099-INT (or sometimes a 1099-OID) if you earned $10 or more in interest during the year. You use this form to report the interest on your tax return. Even if you earn less than $10, you still owe tax on that interest — you just will not receive the form.

The actual tax rate varies. If you are in a lower tax bracket, your interest might be taxed at 10% or 12%. If you are in a higher bracket, it could be 22%, 24%, or higher. The IRS publishes new tax brackets every year, and they change based on inflation.

Key Takeaways

  • Interest earned in a savings account is taxed as ordinary income at your regular tax rate, not at a special rate.
  • The bank sends you a 1099-INT form if you earn $10 or more in interest, which you use to report the income on your tax return.
  • You owe tax on all interest earned, even if the amount is small and you do not receive a 1099-INT form.
  • The tax rate depends on your total income for the year and which tax bracket you fall into.
  • High-yield savings accounts earn more interest, which means you will owe more in taxes on that interest.

How the IRS knows about your interest income

Banks are required to report interest payments to the IRS automatically. When you open a savings account, you provide your Social Security number or tax ID. The bank uses this to track how much interest you earn and report it to the government at the end of the year.

This is why you cannot straightforward skip reporting savings interest on your tax return. The IRS receives a copy of the same 1099-INT form the bank sends to you. If your tax return does not match what the bank reported, the IRS will notice and may send you a notice asking for an explanation or additional payment.

When you receive a 1099-INT form

A 1099-INT arrives in January or early February for interest earned during the previous calendar year. The form shows the total interest the bank paid you. If you have accounts at multiple banks, you will receive a separate 1099-INT from each one.

You will receive a 1099-INT only if your interest totaled $10 or more. However, some banks send the form even for smaller amounts, and some states have lower thresholds. Check with your bank if you are unsure whether you will receive one.

When you file your tax return, you report the amount from the 1099-INT on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest income. If you have less, you can report it directly on Form 1040.

The difference between regular and high-yield savings accounts

A regular savings account at a traditional bank typically earns very little interest — sometimes less than 0.01% per year. A high-yield savings account, usually offered by online banks, earns much more — rates vary but have ranged from 4% to 5% in recent years. The higher the interest rate, the more you earn, and the more you owe in taxes.

This does not mean high-yield accounts are a bad choice. You still come out ahead because you earn more interest than you would at a regular account. The tax you owe is calculated on the interest you actually earned, not on the full balance in your account.

For example, if you keep $10,000 in a high-yield account earning 4.5% annually, you would earn $450 in interest. If you are in the 22% tax bracket, you would owe about $99 in federal income tax on that interest. You still keep $351 in extra earnings — money you would not have earned at all in a regular savings account.

Tax-advantaged accounts that avoid or delay taxes on savings

Some savings vehicles let you earn interest without paying tax on it when ready. A Roth IRA is a retirement account where interest and investment gains grow tax-free, and you do not owe tax when you withdraw the money in retirement (as long as you follow the rules). A 529 plan is designed for education savings and also grows tax-free if the money is used for may have access to education expenses.

A Health Savings Account (HSA) works similarly — interest grows tax-free, and you do not owe tax on withdrawals used for medical expenses. These accounts have contribution limits and rules about when you can withdraw money, so they are not right for all savings goals. But if you are saving for retirement, education, or medical costs, they can significantly reduce the tax you owe.

A regular savings account has no contribution limits and no restrictions on when you can withdraw money, so it remains the best choice for emergency funds or short-term savings goals — even though you will owe tax on the interest.

Reporting interest if you did not receive a 1099-INT

If you earned less than $10 in interest, the bank may not send you a 1099-INT. You still owe tax on that interest. You will need to contact the bank or check your account statements to find out how much interest you earned, then report it on your tax return.

Some people worry that reporting small amounts of interest will trigger an audit. It will not. The IRS is not concerned with interest income under $10. What matters is that you report what you earned accurately. If the amount is small, the tax owed will also be small.

What happens if you do not report savings interest

If you do not report interest income on your tax return, the IRS will eventually notice because the bank reported it. You may receive a notice asking you to file an amended return and pay the tax owed, plus interest on the unpaid amount. The interest the IRS charges is separate from the interest you earned on your savings.

If the IRS determines that you intentionally did not report the income, you could face penalties on top of the back taxes and interest. For most people, the failure to report is treated as an honest mistake, not fraud. The best approach is to report all interest income when you file, even if the amount is small.

Frequently Asked Questions

Do I have to pay taxes on the money I deposit into savings, or only the interest?

Only the interest is taxed. The money you deposit is your own money that you already paid taxes on (if it came from wages). The bank pays you interest as a reward for letting them use your money, and that interest is what the IRS taxes.

What if I have savings accounts at multiple banks?

Each bank reports its interest separately on its own 1099-INT form. You report all of them on your tax return. The total interest from all accounts is added together to determine your tax bracket and how much you owe.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount on your tax return. Fees are separate and generally cannot be deducted unless they are investment-related fees, which savings account fees are not.

Is the interest from a savings account taxed differently than interest from a CD or money market account?

No. All interest income is taxed the same way — as ordinary income at your regular tax rate. The type of account does not matter for tax purposes.

What if my savings interest pushes me into a higher tax bracket?

Interest income is added to your other income to calculate your total taxable income for the year. If the total pushes you into a higher bracket, you pay the higher rate on the portion of income that falls in that bracket, not on all your income.