You pay federal income tax on savings account interest, but not on the money you deposit

The money you put into your savings account is never taxed — that is your own money. But the interest your bank pays you counts as income, and you owe federal tax on it. Most savings accounts earn so little interest that you will owe nothing, but your bank reports what you earned to the IRS, and you have to report it on your tax return.

Some states also tax savings interest, though many do not. The tax rate depends on your total income for the year, not on how much interest you earned. If you earned $50 in interest and your total income puts you in the 22% federal bracket, you do not pay 22% of the $50 — you pay your regular rate on your total income, which now includes that $50.

Key Takeaways

  • Your bank reports interest earned to the IRS on a Form 1099-INT if you earned $10 or more in a calendar year.
  • You report this interest on your federal tax return as ordinary income, taxed at your regular rate.
  • Some states tax savings interest and some do not; check your state's rules or ask your tax preparer.
  • Interest under $10 per year is not reported to the IRS, but you still owe tax on it if you file a return.
  • High-yield savings accounts earn more interest than traditional savings, so you may owe more tax but also keep more money overall.

How your bank reports interest to the IRS

If you earned $10 or more in interest during a calendar year, your bank sends you a Form 1099-INT by January 31 of the following year. This form shows how much interest you earned and goes to the IRS as well. You receive a copy to keep for your records and to use when filing your tax return.

If you earned less than $10, your bank does not send a 1099-INT and does not report it to the IRS. You still owe tax on that interest if you file a return, but the IRS will not know about it unless you report it yourself. Many people with very small interest amounts do not report it, though technically they should.

If you have accounts at multiple banks, each one sends its own 1099-INT. You add up all the interest from all your forms and report the total on your tax return.

Where to report interest on your tax return

On the federal Form 1040, interest income goes on Schedule 1, line 8. If you use tax software, it will ask you about interest income and put it in the right place automatically. If you file by hand or work with a tax preparer, give them all your 1099-INT forms.

The interest is added to your other income — wages, self-employment income, capital gains, and so on — to get your total income for the year. Your tax is then calculated on that total. This means that if you earned $50,000 in wages and $100 in interest, you pay tax on $50,100.

State taxes on savings interest

Most states that have an income tax also tax savings interest the same way the federal government does. A few states — including Pennsylvania, Illinois, and Mississippi — do not tax interest income at all, even though they tax wages and other income. Others tax it only if you are over a certain age or meet other conditions.

If you live in a state with income tax, ask your state tax agency or a tax preparer whether savings interest is taxed in your state. The rules vary enough that it is worth checking rather than assuming.

When high-yield savings accounts change the math

A traditional savings account at a big bank might earn 0.01% interest per year. On $10,000, that is $1 — below the $10 reporting threshold. A high-yield savings account might earn 4% or 5%, which on $10,000 would be $400 to $500. That is real income that you owe tax on.

This does not mean high-yield accounts are a bad choice. You earn far more interest than you would at a traditional bank, and even after paying tax on it, you come out ahead. But it does mean you need to track the interest and report it. Keep your 1099-INT forms and add them to your tax return each year.

Interest from CDs and money market accounts

Certificates of deposit (CDs) and money market accounts work the same way as savings accounts for tax purposes. Your bank reports the interest on a 1099-INT, and you report it on your tax return. If you withdraw a CD before it matures, you may owe an early withdrawal penalty, but that penalty does not reduce the interest you owe tax on — you still report the full interest earned.

If a CD earns interest but you do not withdraw it until the following year, you still owe tax on the interest in the year it was earned, not the year you withdraw the money. This is called accrued interest, and the 1099-INT will show it even if you have not touched the account.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

Technically yes — you owe tax on all income, including interest under $10. But the IRS does not know about it unless your bank reports it, which they do not do for amounts under $10. Many people do not report it, though the law says you should if you file a return.

What if I earned interest but did not get a 1099-INT?

If you earned $10 or more, your bank is required to send one by January 31. If you did not receive it by early February, contact your bank and ask them to send it or provide the amount. If you earned less than $10, no form is required, but you can ask your bank what you earned and report it yourself.

Can I deduct the tax I pay on savings interest?

No. Interest income is taxed as ordinary income at your regular rate. You cannot deduct the tax itself. You can deduct investment expenses in some cases, but not the tax on the interest.

Does moving money between my own accounts count as income?

No. Transferring money from one account to another is not income — it is your own money moving around. Only the interest your bank pays you counts as income.

What if I close my savings account mid-year?

You still owe tax on all the interest you earned up to the day you closed it. Your bank will report it on a 1099-INT for that year. Closing the account does not change what you owe.