The IRS taxes your savings interest as ordinary income, not capital gains
Interest earned in a high yield savings account is taxed by the federal government at your regular income tax rate—the same rate you pay on wages or salary. The IRS treats it as ordinary income, which means it gets added to your total taxable income for the year and taxed at whatever bracket you fall into. If you earn $500 in interest and you're in the 22% tax bracket, you owe roughly $110 in federal tax on that interest alone.
No tax is automatically deducted from your account by the bank. Instead, you report the interest when you file your tax return, and you pay the tax then—or through quarterly estimated payments if the interest is large enough. The bank will send you a Form 1099-INT in January showing how much interest you earned the previous year, and that's the number you report to the IRS.
State and local taxes also apply to savings interest in most places. Some states tax it at your regular income tax rate; others have a lower rate or no tax at all. You'll owe whatever your state requires when you file your state return.
Key Takeaways
- Savings account interest is taxed as ordinary income at your federal tax bracket, not at a lower capital gains rate.
- The bank does not withhold tax from your interest—you report it on your tax return and pay the tax when you file.
- You will receive a Form 1099-INT from your bank in January showing the interest earned in the prior year.
- State and local income taxes also apply to savings interest in most states, and the rate depends on where you live.
- Interest under $10 may not require a 1099-INT, but you still owe tax on it if your state requires reporting.
When the bank sends you Form 1099-INT
Your bank mails or makes available a Form 1099-INT by January 31 each year for any interest you earned the previous calendar year. The form shows the total interest paid to your account during that year. You use this form to report the income to the IRS when you file your tax return.
If you earned less than $10 in interest, the bank may not send you a 1099-INT—but you still owe tax on that interest if you're required to file a return. Check your account statements to find the exact amount and report it yourself.
If you have multiple high yield savings accounts at different banks, each bank sends its own 1099-INT. You add all the interest together when you report it to the IRS.
How your tax bracket determines what you actually owe
The amount of tax you pay on savings interest depends entirely on your tax bracket for that year. Tax brackets change annually and are based on your total income—wages, self-employment income, investment gains, and interest all count toward it.
If you earned $2,000 in savings interest and you're in the 12% federal bracket, you owe about $240 in federal tax. If you're in the 35% bracket, you owe about $700 on the same $2,000. The bank doesn't calculate this for you; the IRS does when you file.
Your state tax rate works the same way. If your state income tax rate is 5%, you owe 5% of your interest income to your state. Some states have no income tax at all, so residents owe nothing to the state on savings interest.
What happens if you don't report the interest
The IRS receives a copy of every 1099-INT your bank sends you. If you don't report the interest on your tax return, the IRS will notice the mismatch between what you reported and what the bank reported. This can trigger an audit or a notice demanding payment plus penalties and interest.
Even small amounts of interest should be reported. The IRS cross-checks 1099 forms automatically, and the penalty for underreporting is steep: typically 20% of the unpaid tax, plus interest that compounds daily.
If you genuinely forgot to report interest from a prior year, you can file an amended return (Form 1040-X) for that year. This is better than waiting for the IRS to find it.
Strategies to reduce taxes on savings interest
You cannot avoid taxes on savings interest, but you can reduce the amount you owe by earning less interest—which sounds counterintuitive but matters in specific situations. If you're near a tax bracket threshold, moving some money to a lower-yield savings account or a money market fund might keep you below that threshold and save you money overall.
Holding savings in a tax-advantaged account like a traditional IRA or 401(k) means the interest compounds tax-free until you withdraw it. Interest earned in a Roth IRA is never taxed at all. If you have money you won't need for years, moving it to one of these accounts before it generates interest can eliminate the tax entirely.
Some people use a strategy called tax-loss harvesting in investment accounts to offset interest income, but this doesn't apply to savings accounts directly. It only works if you have investment losses you can use to reduce your overall taxable income.
How to report savings interest on your tax return
When you file your federal return, you report interest income on Schedule 1 (Form 1040), line 8. You enter the total interest from all your 1099-INT forms combined. This amount gets added to your other income and taxed at your bracket rate.
If you use tax software like TurboTax or H&R Block, you enter the 1099-INT information when prompted, and the software calculates your tax automatically. If you file by hand or with a tax preparer, give them all your 1099-INT forms.
For your state return, follow your state's instructions. Most states have a line for interest income on their main return form. A few states require a separate schedule, so check your state's tax website or ask a preparer.
Interest earned in joint accounts and who pays the tax
If you own a high yield savings account jointly with another person, the bank reports the total interest on a single 1099-INT. You and the co-owner must decide how to split the reported income for tax purposes—usually 50/50, but it can be different if you contributed unequal amounts or have a written agreement.
Each person reports their share of the interest on their own tax return. If you don't split it correctly, one person may overpay and the other may underpay, and the IRS may contact both of you to correct it.
If the account is in a child's name but funded by a parent, the child still owes tax on the interest, not the parent. However, a child with very low income may not be required to file a return at all—check the IRS threshold for dependents each year.
Frequently Asked Questions
Do I have to pay taxes on interest if I earned less than $100?
Yes. The IRS taxes all interest income, no matter how small. The $10 threshold for receiving a 1099-INT is just a reporting requirement—you still owe tax on interest below $10 if you're required to file a return. Check your account statements and report the exact amount.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount shown on your 1099-INT. Fees are not deductible against interest income. However, some fees may be deductible as miscellaneous expenses if you itemize deductions, though this is rare and subject to limits.
What if I moved money between accounts and earned interest twice on the same deposit?
Each bank reports only the interest it actually paid you. If you moved $10,000 from Bank A to Bank B mid-year, Bank A reports interest for the months you held the money there, and Bank B reports interest for the months you held it there. You report both amounts, and the IRS doesn't double-tax you because the total interest is still just what you actually earned.
Do I owe taxes on interest if I close the account before the end of the year?
Yes. You owe tax on all interest earned in that account during the calendar year, whether you close it on January 2 or December 31. The bank reports the interest you earned up to the closing date on your 1099-INT.
What if the bank made an error on my 1099-INT?
Contact the bank immediately and ask them to issue a corrected 1099-INT (Form 1099-INT with a "CORRECTED" box checked). Once you receive it, file an amended return if you already filed, or use the corrected form when you file. Keep records of your communication with the bank in case the IRS questions the discrepancy.