Interest income counts as ordinary income on your federal tax return

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 account interest as part of your state income tax, though a few states do not.

Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. You report this amount on your federal tax return, and it gets added to your other income to determine your total tax bill for the year. Even if you do not receive a 1099-INT because your interest was under $10, you still owe tax on whatever you earned.

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, filing status, and deductions.

Key Takeaways

  • Banks report savings account interest of $10 or more on Form 1099-INT, which you must report on your tax return.
  • Interest income is taxed as ordinary income at your marginal tax rate, which depends on your total income and filing status.
  • Most states tax savings account interest, but a handful of states do not tax interest income at all.
  • You can reduce taxable interest by keeping money in accounts with lower rates or by holding savings in tax-advantaged accounts like IRAs or 529 plans.

How the IRS counts interest as income

The IRS considers interest income to be unearned income — money you receive without performing work. It sits in a different category from wages, but it is taxed the same way. When you file your tax return, you add interest income to your wages, self-employment income, and any other sources of income to arrive at your total income for the year.

Your tax bracket is then determined by that total. If you earned $50,000 in wages and $1,000 in interest, the IRS sees your income as $51,000. That extra $1,000 pushes you slightly higher into your bracket, which means you pay tax on it at your marginal rate — the rate that applies to your highest dollars of income.

This matters because it means interest income can push you into a higher tax bracket or cause you to lose certain deductions or tax credits. For example, if your income is close to the threshold for the Earned Income Tax Credit, interest income could reduce or eliminate that credit.

When your bank reports interest to the IRS

Banks are required to report interest payments to both you and the IRS using Form 1099-INT. You will receive this form by January 31 each year for any interest earned in the previous calendar year. The form shows the total interest paid to you during that year.

The $10 threshold is important: if you earned less than $10 in interest, your bank does not have to send you a 1099-INT or report it to the IRS. However, you still owe tax on that interest. If you earned $8 in interest and do not report it, you are technically underreporting your income, though the IRS is unlikely to pursue such a small amount.

If you have accounts at multiple banks, you will receive a separate 1099-INT from each one. You must add all of them together when you file your return. Some banks also combine interest from multiple accounts into a single 1099-INT if you have several accounts at the same institution.

State taxes on savings account interest

Most states tax interest income as part of their state income tax system. The rate varies by state — some states tax it at the same rate as wages, while others have a separate rate for investment income. A few states, including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, do not have a state income tax at all, so residents pay no state tax on interest.

New Hampshire and Tennessee tax only interest and dividend income, not wages. If you live in one of these states, you would owe state tax on your savings account interest even though you would not owe state tax on wages.

When you file your state tax return, you typically report the same interest income you reported on your federal return. Some states allow deductions or exemptions for certain types of interest — for example, some states exempt interest earned on bonds issued by that state — but ordinary savings account interest is taxable in nearly every state that has an income tax.

How much interest typically triggers a tax bill

The amount of interest that creates a meaningful tax bill depends on your tax bracket and the size of your savings. A person in the 12% federal tax bracket who earns $500 in interest owes about $60 in federal tax. A person in the 24% bracket owes about $120 on the same $500.

High-yield savings accounts currently pay between 4% and 5% annual interest, depending on the bank and current rates. If you have $10,000 in a high-yield account earning 4.5%, you would earn roughly $450 in interest over a year. At the 22% federal tax bracket, that is about $99 in federal tax, plus whatever your state tax rate is.

Traditional savings accounts at large banks typically pay much less — often under 0.5% annually. A $10,000 balance earning 0.4% generates $40 in interest, which creates roughly $9 in federal tax at the 22% bracket. This is why interest from regular savings accounts rarely creates a significant tax burden.

Tax-advantaged alternatives to regular savings accounts

If you want to save money without paying tax on the interest, you have a few options. Individual Retirement Accounts (IRAs) allow you to save money and earn interest tax-free, as long as you do not withdraw the money before age 59½. Traditional IRAs defer taxes until you withdraw, while Roth IRAs allow tax-free withdrawals in retirement.

529 college savings plans let you save for education expenses and earn interest without paying federal tax on the growth, as long as you use the money for may have access to education costs. Some states also offer state tax deductions for 529 contributions.

Certificates of Deposit (CDs) held in an IRA or 529 plan also grow tax-free. Regular CDs held outside these accounts are taxed the same way as savings account interest — you owe tax on the interest even if you do not withdraw the money until the CD matures.

Health Savings Accounts (HSAs) are another option if you have a high-deductible health plan. Interest earned in an HSA is not taxed as long as you use the money for may have access to medical expenses.

Reporting interest on your tax return

When you file your federal tax return, you report interest income on Schedule B (Interest and Ordinary Dividends) if your total interest and dividends exceed $1,500. If your interest is $1,500 or less and you have no other investment income, you can report it directly on Form 1040 without filing Schedule B.

You will need your 1099-INT forms in front of you when you file. List each source of interest separately on Schedule B, then transfer the total to your Form 1040. If you use tax software, it usually walks you through this process and pulls the information from your 1099-INT automatically if you enter it.

For state taxes, you typically report the same interest income on your state return. Some states have their own schedules for interest income, while others let you report it directly on the main return form. Check your state's tax instructions or use state tax software to see what forms you need.

Frequently Asked Questions

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

Technically yes — you owe tax on all interest income, even amounts under $10. Your bank does not have to send you a 1099-INT for interest under $10, but you should still report it. The IRS is unlikely to pursue very small amounts, but underreporting is technically a violation.

Can I deduct the taxes I pay on interest income?

No. Interest income is added to your other income, and you pay tax on the combined total. You cannot deduct the tax itself. However, if you have investment losses, you can use those to offset investment gains, which reduces your taxable interest income.

What if my bank sent me a 1099-INT but I did not receive the interest?

Contact your bank immediately. If the form is incorrect, ask them to issue a corrected 1099-INT (marked as a correction). You will then file an amended tax return with the corrected amount. Do not ignore the discrepancy — the IRS receives a copy of every 1099-INT and will notice if your return does not match.

Does interest from a joint account get split between owners for tax purposes?

Not automatically. The bank reports all interest to the Social Security number listed as the primary account holder on the 1099-INT. If you own the account jointly, you and the other owner need to decide how to split the interest for tax purposes and report it accordingly on your individual returns. Keep documentation of this agreement in case the IRS asks.

Are there any states where savings account interest is not taxed?

Yes — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. New Hampshire and Tennessee tax only interest and dividend income, not wages. If you live in one of these states, you owe no state tax on savings interest, though you still owe federal tax.