Yes, the interest your savings account earns is taxed as ordinary income

The money you deposit into a savings account is yours and not taxed. But the interest the bank pays you on that money is taxed by the federal government, and in most cases by your state too. You report this interest on your tax return each year, and it counts as regular income at whatever tax rate applies to you.

The amount of tax you owe depends on how much interest you earned and your overall income for the year. A savings account earning $50 in interest is taxed differently than one earning $5,000, and both are taxed differently depending on whether you're a single filer, married, or head of household.

Key Takeaways

  • Banks report savings account interest to the IRS on a Form 1099-INT if you earned $10 or more in a year, and you must report it on your tax return.
  • Interest income is taxed at your ordinary income tax rate, which ranges from 10% to 37% federally depending on your total income and filing status.
  • Most states tax savings account interest as income, though a few states do not tax interest income at all.
  • You can reduce taxable interest by keeping some money in a Roth IRA or other tax-advantaged account, where interest grows without annual tax reporting.

How the IRS finds out about your interest income

Your bank automatically reports interest to the Internal Revenue Service using a Form 1099-INT. The bank sends you a copy and sends one to the IRS. This happens if you earned $10 or more in interest during the calendar year. If you earned less than $10, the bank may not issue a 1099-INT, but you still owe tax on that interest if you file a return.

The bank reports the interest in the year it was paid to you, not the year you withdraw it. If your account earned $200 in interest in January 2024, that $200 is taxable in 2024 even if you don't touch the money until 2025.

You report this interest on your federal tax return using Schedule B (if you have more than $1,500 in interest income) or directly on Form 1040 (if you have $1,500 or less). The IRS matches what you report to what the bank reported, so leaving it off your return triggers an audit notice.

What tax rate applies to your interest income

Savings account interest is taxed as ordinary income, meaning it uses the same tax brackets as wages or salary. In 2024, federal tax rates range from 10% to 37% depending on how much total income you have and how you file.

A single person with $50,000 in wages and $1,000 in interest income pays tax on the full $51,000. If that person falls in the 22% tax bracket, roughly $220 of the interest becomes federal tax (before deductions and credits). Someone with $200,000 in income falls in a higher bracket and pays more tax on the same $1,000 in interest.

State income tax works the same way. Most states tax interest as ordinary income and add their own rate on top of federal tax. A few states—including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—do not tax income at all. New Hampshire and Tennessee tax interest and dividend income but not wages.

When you receive a 1099-INT and what it means

Banks mail 1099-INT forms by January 31 each year for interest paid in the previous year. The form shows the total interest earned in box 1. If you earned interest from multiple banks, you'll receive multiple 1099-INT forms, one from each bank.

Keep your 1099-INT with your tax records. You don't mail it to the IRS—the bank does that automatically. But you need it to fill out your tax return correctly, and you may need it if the IRS questions your return later.

If you move or change your address, make sure the bank has your current mailing address so the 1099-INT reaches you. If you don't receive one by early February and you know you earned interest, contact the bank and ask them to send it or provide the information you need to report the interest yourself.

Reducing taxable interest with tax-advantaged accounts

A regular savings account offers no tax break. But money in a Roth IRA or Roth 401(k) earns interest that is never taxed, even when you withdraw it in retirement. A traditional IRA or 401(k) defers the tax until you withdraw the money, which can be years or decades later.

These accounts have contribution limits—for 2024, you can put $7,000 per year into an IRA (or $8,000 if you're 50 or older), and 401(k) limits are much higher. But the tax savings can be substantial if you have a large emergency fund or other savings earning interest.

A high-yield savings account (HYSA) in a regular bank account still requires you to report and pay tax on the interest, but the higher interest rate means you earn more to begin with. Some people use a combination: tax-advantaged accounts for retirement savings and a HYSA for emergency funds they may need before retirement.

What happens if you don't report interest income

The IRS receives a copy of every 1099-INT the bank sends you. If you don't report the interest on your tax return, the IRS computer system flags the discrepancy and sends you a notice. This usually happens months after you file, sometimes a year or more later.

The IRS will calculate what you owe in back taxes, plus interest on that amount (currently around 8% per year), and may add penalties. If the omission was unintentional, the penalty is usually 20% of the unpaid tax. If the IRS determines it was intentional, penalties can reach 75%.

Reporting the interest, even if it's small, takes a few minutes and avoids this problem entirely. If you earned interest but didn't receive a 1099-INT, you can still report it yourself using the bank statement or a letter from the bank showing the amount.

Interest income from different types of accounts

Regular savings accounts, money market accounts, and certificates of deposit (CDs) all generate interest that must be reported on your taxes. The source doesn't matter—the IRS taxes all interest income the same way.

If you have a CD that matures in a future year, you report the interest in the year it's paid to you, not the year the CD matures. Some CDs pay interest annually, others monthly. Each payment is reported separately on the 1099-INT.

Interest from bonds, bond funds, and Treasury securities is also taxable, though Treasury interest is exempt from state tax. Interest from municipal bonds is usually exempt from federal tax and often from state tax too, which is why they appeal to high-income earners.

Frequently Asked Questions

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

The bank doesn't have to send you a 1099-INT if you earned less than $10, but you still owe tax on that interest if you file a return. Report it on your tax return using the amount from your bank statement or a letter from the bank.

Can I deduct savings account interest as a loss?

No. Interest income is taxable, but you cannot deduct it as a loss or expense. You report the full amount as income, and your tax liability is calculated from there.

What if the bank reports the wrong amount on my 1099-INT?

Contact the bank immediately and ask them to issue a corrected 1099-INT (called a 1099-INT with a "corrected" indicator). The bank will send the corrected form to you and the IRS. Report the corrected amount on your tax return.

Is interest from a joint savings account taxed differently?

The interest is reported to the IRS under the Social Security number of the account owner listed first on the account. If both owners have equal claim to the account, you may need to split the interest reporting between you—ask the bank how they handle this and report accordingly on your individual returns.

Do I pay tax on interest if I'm retired and don't work?

Yes. Interest income is taxable regardless of whether you have other income. However, if your only income is interest and it's below the standard deduction for your age and filing status, you may not owe federal tax. You still file a return to report it, and the IRS will confirm you owe nothing.