Savings account interest counts as taxable income
Yes. The interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on the full amount. Most states also tax savings interest as part of your state income tax, though a few states do not.
Your bank will send you a form called a 1099-INT at the end of each year if you earned $10 or more in interest. You report that amount on your tax return. Even if the bank does not send you a 1099-INT, you still owe tax on any interest you earned — the $10 threshold is just when the bank is required to report it to the IRS.
The tax you owe depends on your overall income and tax bracket. If you earned $500 in interest and you are in the 22% federal tax bracket, you would owe roughly $110 in federal tax on that interest alone. The exact amount varies based on your total income for the year.
Key Takeaways
- Savings account interest is taxable income at both the federal and state level in most states.
- Your bank reports interest of $10 or more on a 1099-INT form, which you include on your tax return.
- The tax you owe on interest depends on your tax bracket — higher earners pay a higher percentage.
- You can reduce taxable interest by holding money in tax-advantaged accounts like IRAs or 529 plans, though these have contribution limits and withdrawal rules.
- Interest earned in a Roth IRA or Roth 401(k) is not taxed, but traditional retirement accounts defer the tax until you withdraw the money.
How the IRS knows about your interest
Banks report interest to the IRS automatically through the 1099-INT form. Your bank sends you a copy and files another copy with the IRS. The IRS then matches what you report on your tax return against what the bank reported. If the numbers do not match, you may receive a notice asking you to explain the difference.
Even small amounts of interest add up across multiple accounts. If you have savings at three different banks, each one reports separately. You are responsible for adding all of them together when you file your return. The IRS will see all three 1099-INT forms, so underreporting is easy to catch.
When you do not receive a 1099-INT
If you earned less than $10 in interest during the year, your bank is not required to send you a 1099-INT. However, you still owe tax on that interest. You must report it on your return even though the bank did not report it to the IRS.
This matters most if you have multiple small savings accounts or if interest rates were very low during the year. Keep your own records of interest earned — many banks show it on your monthly statement or annual summary. If you cannot find the exact amount, contact the bank and ask them to calculate your total interest for the year.
Tax-advantaged accounts that reduce or eliminate interest tax
A traditional IRA or traditional 401(k) lets you earn interest without paying tax on it each year. The tax is deferred until you withdraw the money in retirement. This means interest compounds faster because you are not paying tax along the way. However, you can only contribute a limited amount each year — for 2024, the limit is $7,000 for an IRA if you are under 50, and $23,500 for a 401(k).
A Roth IRA or Roth 401(k) is even better for interest: you never pay tax on the interest, even in retirement. The catch is that you contribute money that has already been taxed, and you cannot withdraw the earnings until you are 59½ without paying a penalty. The contribution limits are the same as traditional accounts.
A 529 college savings plan lets interest grow tax-free as long as you use the money for education expenses. If you withdraw it for something else, you pay tax on the interest portion plus a 10% penalty. These plans have no annual contribution limit, but there is a total account balance limit that varies by state — usually between $235,000 and $550,000.
A Health Savings Account (HSA) also grows interest tax-free if you use withdrawals for medical expenses. You can contribute up to $4,150 per year if you have individual coverage, or $8,300 for family coverage in 2024. Unlike a 529, you can withdraw money for any reason after age 65 without penalty, though non-medical withdrawals before 65 are taxed and penalized.
Reporting interest on your tax return
You report interest income on Schedule B of your Form 1040 if you have more than $1,500 in interest and dividend income combined. If you have less than that, you can report it directly on the main 1040 form. You list each 1099-INT you received and add them up to get your total interest income.
If you earned interest in a traditional IRA or 401(k), that interest does not appear on a 1099-INT at all — it is not reported to the IRS because it is not taxable that year. Interest in a Roth account also does not appear on a 1099-INT. Only interest in regular savings accounts, money market accounts, and CDs gets reported on a 1099-INT.
Keep copies of all 1099-INT forms you receive. The IRS matches them against what you report, so the numbers must match exactly. If a bank sends you a corrected 1099-INT (called a 1099-INT with a "corrected" box checked), use the corrected version instead of the original.
State income tax on savings interest
Most states tax savings interest as part of your state income tax return. A few states do not have income tax at all — these include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire and Tennessee tax only interest and dividend income, not wages.
If you live in a state with income tax, you report the same interest income on your state return that you reported on your federal return. Some states allow deductions or exemptions for interest earned by seniors or for interest in certain types of accounts, but these vary widely. Check your state's tax authority website or your state tax form instructions for details.
What happens if you do not report interest income
The IRS receives a copy of every 1099-INT your bank sends you. If you do not report the interest on your tax return, the IRS will eventually notice the discrepancy. You may receive a notice asking you to file an amended return and pay the tax you owe, plus interest on the unpaid tax and possibly penalties.
The penalty for not reporting income is usually 20% of the unpaid tax, though it can be higher if the IRS determines the underreporting was intentional. Interest accrues on the unpaid tax at a rate set by the IRS each quarter — for 2024, it is 8% per year. Over time, these add up significantly. It is always cheaper to report the interest when you file than to deal with an IRS notice later.
Frequently Asked Questions
Do I have to pay tax on interest if I reinvest it back into the account?
Yes. It does not matter what you do with the interest — whether you withdraw it, leave it in the account, or move it to another account. The IRS taxes it in the year it was earned. Reinvesting does not change the tax obligation.
What if I earned interest but the bank made a mistake on the 1099-INT?
Contact the bank immediately and ask them to issue a corrected 1099-INT. They will send you a corrected form and file a corrected form with the IRS. Use the corrected form when you file your tax return. If you already filed, you may need to file an amended return.
Can I deduct savings account interest as a business expense?
No. Interest earned on a personal savings account is always taxable income, not a deductible expense. The only exception is if you have a business account and the interest is incidental to business operations — even then, it is income, not a deduction.
Is interest from a money market account taxed differently than a savings account?
No. Money market accounts are taxed the same way as savings accounts. The bank reports the interest on a 1099-INT, and you report it as taxable income. The only difference is the interest rate, which is usually higher for money market accounts.
Do I owe tax on interest if I am a minor?
Yes, but you may be able to file a simpler return or be claimed as a dependent on your parent's return. If your interest income is below a certain threshold (which varies by year and filing status), you may not have to file a return at all. Check the IRS website or ask a tax professional about the current threshold for dependents.