Interest on savings accounts is taxable income

Yes. Any interest your savings account earns counts as income, and you owe federal income tax on it. Your bank or credit union will report the interest to the IRS on a Form 1099-INT if you earned $10 or more in a calendar year. You report this interest on your tax return, and it gets taxed at your ordinary income tax rate — the same rate as your salary or wages.

This applies to all types of savings accounts: regular savings, money market accounts, and certificates of deposit (CDs). It does not matter whether you withdraw the interest or leave it in the account. The moment the bank credits it, it becomes taxable income in that tax year.

State and local income taxes also apply to savings interest in most states. A few states — including Florida, Texas, and Wyoming — have no state income tax, so residents there owe only federal tax. If you live in a state with income tax, you will report the same interest amount to both your state and federal returns.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax rate, plus state and local income tax if your state collects it.
  • Banks report 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 interest is taxable in the year it is credited to your account, regardless of whether you withdraw it or leave it to compound.
  • High-yield savings accounts earn more interest but are also fully taxable; the higher earnings mean higher tax liability.
  • You can reduce taxable interest by holding money in tax-advantaged accounts like IRAs or 529 plans, though those have contribution limits and withdrawal rules.

When the bank reports your interest to the IRS

Your bank sends you a Form 1099-INT by January 31 of the following year. This form shows the total interest earned in the previous calendar year. The bank also sends a copy to the IRS, so the agency already knows about your interest before you file your return.

You do not receive a 1099-INT if your interest was less than $10 in the year. However, you still owe tax on that interest — you just have to report it yourself. Many people with small savings balances miss this because they assume no form means no tax obligation. That is incorrect.

If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. Add them all together when you report on your tax return. If you moved money between accounts or closed an account mid-year, the interest is still taxable for the full year it was earned.

How your tax bracket affects what you owe

Savings interest is added to your other income and taxed at your marginal tax rate — the highest tax bracket you fall into. If you earn $50,000 in salary and your savings account earns $500 in interest, your taxable income is $50,500, and that extra $500 is taxed at whatever rate applies to income in that range.

For 2024, federal tax brackets range from 10% to 37%, depending on your filing status and total income. A person in the 22% bracket pays 22 cents in federal tax on every dollar of savings interest. Someone in the 12% bracket pays 12 cents per dollar. The higher your income, the higher the rate applied to your interest.

This is why high-yield savings accounts, which currently earn 4% to 5% APY, can create a larger tax bill than older savings accounts earning 0.01%. You earn more interest, but you also owe more tax on it. A $10,000 deposit earning 4.5% generates $450 in interest; if you are in the 24% federal bracket, you owe $108 in federal tax on that interest alone.

State and local taxes on savings interest

Most states tax savings interest as part of your state income tax return. The interest amount you report to the IRS is the same amount you report to your state — you do not calculate it separately. Your state tax rate varies by state and by your income level within that state.

Nine states have no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividend income, not wages). If you live in one of these states, you owe only federal tax on your savings interest.

Some cities and counties also tax income. New York City, for example, adds a city income tax on top of state and federal tax. If you live in a place with local income tax, your total tax on savings interest can be 5 to 10 percentage points higher than the federal rate alone.

Interest earned in tax-advantaged accounts

Money held in a traditional IRA or 401(k) grows tax-free while it stays in the account. You do not pay tax on the interest, dividends, or capital gains each year. You only pay tax when you withdraw the money in retirement. This is one major advantage of retirement accounts: your savings can compound without being reduced by annual tax bills.

A Roth IRA works differently: contributions go in after tax, but all growth — including interest — is tax-free forever, even in retirement. If you earn $500 in interest in a Roth IRA, you owe zero tax on it, now or later.

529 college savings plans also grow tax-free as long as the money is used for education expenses. Interest earned in a 529 is not taxed annually, and withdrawals for tuition, room and board, or student loans are tax-free.

These accounts have limits: you can contribute only $7,000 per year to an IRA (or $8,000 if you are 50 or older), and 529 plans have aggregate contribution limits that vary by state. But if you have money you will not need for several years, moving it into one of these accounts can save you significant tax on the interest it earns.

What to do if you did not receive a 1099-INT

If your interest was $10 or more and you did not receive a 1099-INT by February 15, contact your bank. The bank may have the wrong address on file, or the form may have been delayed. Ask the bank to send you a corrected form or a statement showing the interest earned.

If you cannot get a 1099-INT from the bank, you can still report the interest on your tax return. Use your account statements to calculate the total interest credited during the year. The IRS will not penalize you for reporting interest that the bank failed to report, as long as you report it accurately.

Do not skip reporting interest just because you did not receive a form. The IRS has a copy of the 1099-INT the bank sent, and if your return does not match, you will receive a notice asking you to explain the discrepancy. It is easier to report it correctly the first time.

Frequently Asked Questions

Do I owe tax on interest if I did not withdraw it from my account?

Yes. Interest is taxable in the year it is credited to your account, whether you withdraw it or leave it to compound. The bank reports it to the IRS based on when it was added to your balance, not when you moved the money.

What if I earned less than $10 in interest?

You still owe tax on it, but the bank does not have to send you a 1099-INT. You report the interest on your tax return using your account statements. Many people miss this because they assume no form means no tax, which is incorrect.

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

No. You report the full interest amount the bank credits. Fees are not deductible against interest income. However, if a bank charged you fees that exceeded the interest you earned, you may be able to deduct investment expenses, though this is limited and requires itemizing deductions.

Is interest from a joint savings account split between both owners for tax purposes?

Not automatically. The bank reports the full interest amount on a 1099-INT to whoever is listed as the account owner. If the account is truly joint, you and the other owner should split the interest on your respective tax returns. Keep documentation showing how you divided it in case the IRS asks.

Does a high-yield savings account get taxed differently than a regular savings account?

No. Both are taxed the same way — as ordinary income at your tax rate. A high-yield account earns more interest, so you owe more tax on it, but the tax treatment is identical. The higher earnings are not taxed at a special rate.