Interest from a savings account is taxable income

Yes. The interest your bank pays you on a high-yield savings account counts as ordinary income, and you owe federal income tax on it. Your state may tax it too. The IRS treats savings account interest the same way it treats wages or freelance income—it's money you earned, so it's taxable.

The amount you owe depends on your total income for the year and your tax bracket. If you earned $500 in interest and you're in the 22% federal tax bracket, you don't automatically owe $110. Instead, that $500 gets added to your other income, and you calculate your total tax bill based on where the combined amount lands in the tax brackets.

Banks report this interest to the IRS on a Form 1099-INT, and they send a copy to you by January 31 each year. You must report it on your tax return, even if the bank didn't send the form yet or if you didn't receive it.

Key Takeaways

  • Interest earned in a high-yield savings account is taxable income at both federal and state levels in most cases.
  • Your bank reports the interest to the IRS on Form 1099-INT by January 31, and you report it on your tax return.
  • The tax you owe depends on your total income and tax bracket, not a flat percentage of the interest.
  • If you earn less than $10 in interest during the year, the bank may not send a 1099-INT, but you still owe tax on it if you file a return.

When the bank sends you a 1099-INT

Your bank will mail or email you a Form 1099-INT by January 31 if you earned at least $10 in interest during the previous calendar year. This form shows the total interest paid to you and goes to the IRS at the same time.

You'll receive the form even if you closed the account partway through the year. If you had multiple savings accounts at different banks, each bank sends its own 1099-INT for the interest it paid.

Keep the 1099-INT with your tax records. You don't attach it to your return, but you do report the amount on your tax form (usually Schedule B if you have investment income, or directly on Form 1040 if the amount is small).

How to report savings account interest on your taxes

When you file your federal return, you report the interest income on Schedule B (Interest and Ordinary Dividends) if your total interest and dividends exceed $1,500. If it's less than that, you can report it directly on Form 1040 or Form 1040-SR, depending on your age.

The process is straightforward: you enter the amount from your 1099-INT into the appropriate line on your return. If you have interest from multiple accounts, add them all together and report the total. Tax software like TurboTax, H&R Block, or TaxAct will walk you through this step and pull the information from your 1099-INT if you enter it.

Your state tax return works similarly. Most states tax interest income the same way the federal government does. A few states (like Pennsylvania and New Hampshire) don't tax interest income at all, so check your state's rules if you live there.

What happens if you don't report the interest

The IRS receives a copy of every 1099-INT your bank sends. If you don't report the interest on your return, the IRS will notice the discrepancy. They may send you a notice asking for the missing income and any unpaid tax, plus penalties and interest charges.

Even small amounts matter. If you earned $50 in interest and didn't report it, the IRS can still pursue it. The penalty for not reporting income is usually 20% of the unpaid tax, plus interest that compounds daily. It's far cheaper to report the interest when you file.

If you discover you missed reporting interest from a prior year, you can file an amended return (Form 1040-X) for that year. The sooner you do this, the less interest will accrue on the unpaid tax.

Interest under $10 and other edge cases

If you earned less than $10 in interest during the year, your bank may not send a 1099-INT. However, you still owe tax on that interest if you file a return. You'll need to track it yourself—check your account statements or your year-end summary from the bank.

If you're not required to file a return (because your income is below the filing threshold), you don't owe tax on the interest. But if you do file a return for any reason—to claim a refund, for example—you must report all interest earned, even amounts under $10.

Joint account holders should clarify with their bank how interest is reported. If the account is in both names, the bank typically reports all interest to one person's Social Security number, so only one 1099-INT is issued. Make sure you and your co-owner agree on who reports what to avoid duplicate reporting to the IRS.

Strategies to minimize taxes on savings interest

You can't avoid paying tax on interest, but you can reduce how much interest you earn (and thus how much tax you owe) by keeping money in lower-yield accounts. This is rarely a good trade-off—the tax on $500 in interest is far less than the interest you'd lose by moving money to a regular savings account.

If you're saving for retirement, consider using a traditional IRA or Roth IRA instead of a regular savings account. Interest earned inside these accounts is not taxed each year. In a traditional IRA, you may also deduct your contributions from your taxable income. In a Roth IRA, withdrawals in retirement are tax-free.

If you have a very high balance in a savings account, you might split it across multiple banks to stay under FDIC insurance limits ($250,000 per depositor per bank). This doesn't reduce your taxes, but it does protect your money if a bank fails.

State taxes on savings account interest

Most states tax interest income as ordinary income, meaning it's added to your other income and taxed at your state rate. A handful of states don't tax interest at all: Pennsylvania, New Hampshire, Tennessee, and Illinois (Illinois only taxes interest earned before 2021). A few others tax it at a flat rate or with special rules.

If you live in a state that taxes interest and you earned interest in a savings account, you'll report it on your state return the same way you report it federally. Your state may have its own form or schedule, or it may use the federal 1099-INT amount directly.

If you moved to a new state during the year, you may owe tax to both states on the interest earned while you lived in each one. Check your new state's rules on how to report income earned in a prior state.

Frequently Asked Questions

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

Your bank won't send a 1099-INT for amounts under $10, but you still owe tax on it if you file a return. Track the interest from your account statements and report it on your return. If you're not required to file a return, you don't owe tax on the interest.

What if my bank didn't send me a 1099-INT?

Contact the bank and ask for a copy. If you earned at least $10 in interest, they're required to send one by January 31. If they can't locate it, ask for a written statement of the interest paid. You can report that amount on your return even without the official form.

Can I deduct losses from a savings account?

No. Savings accounts don't generate losses—they earn interest or sit flat. You can't deduct interest paid on a savings account the way you might deduct investment losses. The interest is always taxable income.

Do I pay taxes on interest if I'm a minor?

Yes, minors owe tax on interest income. A parent or guardian may be able to claim the minor as a dependent, which affects the dependent's tax filing requirements, but the interest itself is still taxable. Check IRS rules on dependent filing thresholds for the current year.

What's the difference between federal and state taxes on savings interest?

Federal tax is owed to the IRS and is based on your federal tax bracket. State tax is owed to your state and is based on your state's tax rate and rules. Most states follow federal rules, but some have different rates or don't tax interest at all. You file separate returns for each.