Interest from savings accounts is taxable income

Yes, you owe federal income tax on the interest your savings account earns. The bank or credit union treats that interest the same way the IRS does: as ordinary income, taxed at your regular income tax rate. If you earned $50 in interest over a year, that $50 counts toward your total taxable income for that year.

The amount you owe depends on your tax bracket, not on the interest rate itself. Someone in the 22% tax bracket pays roughly 22 cents in federal tax per dollar of interest earned. Someone in the 12% bracket pays roughly 12 cents. State income tax, where it exists, stacks on top of that.

Most people don't owe taxes on small amounts of interest—under $10 or $20 a year—because the standard deduction covers it. But the IRS still wants to know about it, and the bank will report it to both you and the tax agency.

Key Takeaways

  • Banks report savings account interest to the IRS on Form 1099-INT when you earn $10 or more in a calendar year.
  • You add that interest to your other income and pay tax at your regular income tax rate, plus state tax if your state has one.
  • The interest is taxable even if you don't withdraw it—the tax is owed in the year you earned it, not when you spend it.
  • High-yield savings accounts earn more interest, which means more tax owed, but the after-tax return is still usually higher than traditional savings accounts.

How the IRS finds out about your interest

Your bank sends you a Form 1099-INT each January if you earned $10 or more in interest during the previous calendar year. The bank sends a copy to the IRS at the same time. The form shows your name, Social Security number, and the exact amount of interest paid.

You don't have to do anything with the form except keep it for your records and report the interest when you file your tax return. If you earned interest but didn't receive a 1099-INT, you still owe tax on it—the form is just the bank's way of telling the IRS. If you earned less than $10, the bank may not send a form, but you should still report the interest if you file a return.

The IRS cross-checks the 1099-INT against your tax return. If you don't report the interest, the agency will notice the mismatch and may send you a bill for the unpaid tax plus penalties and interest.

When you report the interest on your tax return

Interest income goes on Schedule B (Interest and Ordinary Dividends) if you earned more than $1,500 in interest and dividends combined. If you earned $1,500 or less, you can report it directly on Form 1040 without filing Schedule B. Either way, the interest is added to your other income and taxed at your marginal rate.

You report the interest in the tax year you earned it, not the year you withdraw the money. If you earned $100 in interest in December 2024 but didn't touch the account until 2025, you owe tax on that $100 in 2024. The interest is considered income the moment it posts to your account.

If you file jointly with a spouse, you each report interest earned in accounts held in your individual names. Interest in a joint account is split between you, usually 50-50 unless you can show the IRS a different ownership split.

How much tax you actually owe on interest

Your tax rate on interest depends on your total income and filing status. The federal tax brackets for 2024 range from 10% to 37%. If you're in the 22% bracket and earn $500 in interest, you owe roughly $110 in federal tax on that interest (plus state tax if applicable).

High-yield savings accounts currently earn 4% to 5% APY, which means a $10,000 balance generates $400 to $500 per year in interest. At the 22% federal rate, that's $88 to $110 in federal tax owed. State tax varies: California, New York, and other high-tax states add another 5% to 13%, while states with no income tax (Texas, Florida, Nevada, Tennessee, Wyoming, South Dakota, Washington, Alaska) add nothing.

The after-tax return is still positive—you keep more money than you started with—but it's lower than the advertised APY. A 5% APY becomes roughly 3.9% after federal tax at the 22% rate, or lower if you also owe state tax.

Interest earned in tax-advantaged accounts

Some savings vehicles let you earn interest without owing federal tax on it. A Roth IRA or Roth 401(k) grows tax-free, and you owe no tax on the interest when you withdraw it in retirement (as long as you follow the rules). A traditional IRA or 401(k) defers the tax—you don't pay it now, but you will when you withdraw the money.

A 529 college savings plan lets interest grow tax-free if you use the money for may have access to education expenses. A Health Savings Account (HSA) works the same way for medical expenses. These accounts are worth using if you have a specific goal and can follow the withdrawal rules.

Regular savings accounts, money market accounts, and CDs have no tax shelter. The interest is taxable no matter where you hold it, unless it's inside one of the accounts listed above.

What to do if you owe tax on interest but can't pay it all at once

If your interest income pushed you into a higher tax bracket or you owe more than you expected, you have options. You can set up a payment plan with the IRS through their website or by calling 1-800-829-1040. The agency charges a fee (currently $31 to $225 depending on the method) and interest on the unpaid balance, but you won't face criminal charges for owing.

If you think you'll owe tax, you can make estimated tax payments throughout the year instead of paying it all at once when you file. This is most relevant if you have other self-employment income or investment income beyond the interest.

You can also reduce future tax by moving money to a high-yield savings account inside a Roth IRA or other tax-sheltered account, though this only works if you have contribution room left for the year.

Frequently Asked Questions

Do I owe taxes on interest I didn't withdraw?

Yes. The IRS taxes interest in the year you earned it, regardless of whether you spent it, withdrew it, or left it in the account. If your savings account earned $200 in interest in 2024, you owe tax on that $200 in 2024, even if the money is still sitting there.

What if I earned less than $10 in interest?

The bank won't send you a 1099-INT, but you still owe tax on the interest if you file a return. Report it on Schedule B or directly on Form 1040. The amount is small enough that it may not change your tax bill, but the IRS wants to know about it.

Can I deduct savings account fees to offset the interest?

No. Fees you pay to maintain the account are not deductible. You report the full interest amount as income and pay tax on it, even if fees reduced your net earnings. This is one reason high-yield accounts with no monthly fees are better than traditional accounts with fees.

Do I owe state tax on savings account interest?

It depends on your state. States with income tax (California, New York, Illinois, and most others) tax interest the same way the federal government does. States with no income tax (Texas, Florida, Nevada, Tennessee, Wyoming, South Dakota, Washington, Alaska) don't tax it. Check your state's tax agency website if you're unsure.

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

No. Money market accounts, savings accounts, and CDs all report interest on Form 1099-INT and are taxed as ordinary income. The tax treatment is identical—only the interest rate and account features differ.