The IRS taxes all savings account interest as ordinary income
Every dollar of interest your savings account earns is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on the full amount. Your bank or credit union will report this interest to you and to the IRS on a Form 1099-INT if you earned $10 or more in a calendar year.
The tax you owe depends on your total income and your tax bracket, not on the interest rate itself. If you earn $500 in savings interest and you are in the 22% tax bracket, you do not automatically owe $110 in taxes — you owe 22% of the amount by which your total income exceeds the threshold for your bracket. The exact calculation happens when you file your tax return.
State and local taxes may also apply. Some states tax interest income, others do not. A few states exempt interest earned in accounts held by residents over a certain age. Check your state's tax authority website or ask a tax preparer whether your state taxes savings interest.
Key Takeaways
- All savings account interest is taxable as ordinary income at the federal level, regardless of the account type or interest rate.
- Your bank reports interest of $10 or more per year on Form 1099-INT, which you receive by January 31 and must report on your tax return.
- The tax you owe depends on your total income and tax bracket, not on the interest amount alone.
- Some states tax savings interest and others do not; check your state's rules or consult a tax preparer for your situation.
- You can reduce taxable interest by holding money in tax-advantaged accounts like Roth IRAs or 529 plans, though these have contribution limits and withdrawal rules.
When you receive the Form 1099-INT and what it includes
Your bank mails or makes available a Form 1099-INT by January 31 of the year after you earn the interest. The form shows the total interest paid to you during the previous calendar year. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one.
The form lists interest in Box 1. If you earned interest in a brokerage account or money market fund, that may appear in a different box, but the principle is the same — it is all taxable. You do not need to do anything with the form except keep it for your records and report the amount on your tax return.
If you did not receive a 1099-INT but you know you earned interest, contact your bank. They may have mailed it to an old address, or they may have made it available online only. You are still required to report the interest even if you do not receive the form.
How to report savings interest on your federal tax return
On your federal return, you report interest income on Schedule B (if you use Form 1040) or on the appropriate line of your tax form. If you use tax software, it will walk you through entering the amounts from your 1099-INT forms. If you file by hand or with a preparer, you add up all interest from all sources and enter the total on the line for interest income.
The interest then flows into your total income, which determines your tax bracket and how much tax you owe overall. You do not calculate tax on the interest alone — the IRS calculates tax on your entire income, including wages, self-employment income, investment gains, and interest.
If you earned less than $10 in interest across all accounts in a year, you do not receive a 1099-INT, but you still must report the interest if you file a return. Keep your own records of small amounts.
Tax brackets and the real cost of your savings interest
The amount of tax you owe on savings interest depends on your tax bracket. In 2024, federal tax brackets range from 10% to 37%, depending on your filing status and total income. If you earn $500 in interest and you are in the 12% bracket, you do not owe $60 in taxes on that interest alone — you owe 12% of the portion of your income that falls within the 12% bracket.
This matters because high-yield savings accounts advertise rates like 4% or 5%, but the after-tax return is lower. If you earn $1,000 in interest at a 5% rate and you are in the 24% tax bracket, you keep roughly $760 after federal tax. State tax would reduce it further.
The real after-tax return on your savings is the interest rate minus the tax you owe. This is why some people move money to tax-advantaged accounts when they can — the interest grows without being taxed each year.
Tax-advantaged accounts that shield savings interest from tax
A Roth IRA or Roth 401(k) allows interest and other earnings to grow tax-free. You do not pay tax on the interest when you earn it, and you do not pay tax when you withdraw the money in retirement (as long as you follow the rules). However, you can only contribute a limited amount per year — $7,000 for most people in 2024, or $8,000 if you are 50 or older.
A 529 college savings plan also grows interest tax-free if you use the money for education expenses. If you withdraw money for non-education purposes, you owe tax on the earnings portion, plus a 10% penalty.
A traditional IRA or 401(k) defers tax on interest until you withdraw the money in retirement, at which point you owe tax on the full amount. This is different from a Roth, where you pay no tax on withdrawals.
These accounts have annual contribution limits, income limits (for Roth IRAs), and rules about when you can withdraw money without penalty. They are not a solution for all your savings, but they can reduce your tax burden on a portion of it.
Interest from bonds, CDs, and money market accounts
Interest from certificates of deposit (CDs), money market accounts, and Treasury bonds is also fully taxable. A CD that pays 5% interest is taxed the same way as a savings account earning 5%. The bank or issuer reports it on a 1099-INT.
Treasury bonds and Treasury bills are taxed at the federal level but are exempt from state and local income tax. If you live in a high-tax state, this can make Treasuries slightly more attractive than other interest-bearing accounts, though the federal tax still applies.
Municipal bonds are different — the interest is usually exempt from federal tax and often from state tax as well. However, municipal bonds carry different risks and are typically held by investors with larger amounts to invest.
What happens if you do not report savings interest
The IRS receives a copy of every 1099-INT your bank files. If you do not report the interest on your tax return, the IRS will notice the discrepancy. You may receive a notice asking you to file an amended return or pay the tax you owe, plus interest and penalties.
The penalty for not reporting income is typically 20% of the underpaid tax, plus interest that accrues from the original due date. If the IRS determines the underreporting was fraudulent (which is rare for simple interest income), the penalty can be higher.
If you made an honest mistake, you can file an amended return (Form 1040-X) to correct it. The sooner you do, the less interest accrues on the amount owed.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
You do not receive a 1099-INT if you earned less than $10, but you are still required to report the interest on your tax return if you file one. Keep your own records of the amount.
Is interest from a joint savings account taxed differently?
The interest is taxed based on who owns the account and who reports it. If the account is jointly owned, the bank may split the interest between both owners on separate 1099-INT forms, or it may report all of it to one owner. Check with your bank about how they report joint account interest, and make sure both owners report their share on their tax returns.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. Fees are not deductible against interest income. However, if you paid investment advisory fees or fees to a tax preparer, those may be deductible in limited circumstances — consult a tax professional about your specific situation.
What if my savings account interest is very small — like $2?
You still owe tax on it if you file a return. The amount is small, but it is still income. If you do not file a return for other reasons, you do not need to file just for $2 in interest, but if you do file, you must report it.
Does moving money to a high-yield savings account change how I report interest?
No. Whether your interest comes from a regular savings account at 0.01% or a high-yield account at 4.5%, you report it the same way on your tax return. The bank sends a 1099-INT, and you report the amount as interest income.