Savings account interest counts as income on your tax return
Interest you earn on a savings account is taxable income. The IRS treats it the same way it treats wages or salary — you have to report it, and you may owe federal income tax on it. Your bank will send you a form showing how much interest you earned, and you'll include that number when you file your return.
The amount of tax you actually pay depends on your total income and your tax bracket. Someone earning $30,000 a year will owe less tax on $100 in interest than someone earning $150,000. But either way, the interest itself is not tax-free.
State income tax may also apply, depending on where you live. Some states don't have income tax at all, while others tax interest the same way the federal government does.
Key Takeaways
- Your bank sends you a Form 1099-INT each year showing all interest earned, and you must report this amount on your tax return.
- Interest is taxed as ordinary income at your regular tax rate, not at a lower capital gains rate.
- You report interest income even if the amount is small — there is no minimum threshold before it becomes taxable.
- State income tax on interest varies by state; some states have no income tax, while others tax it the same as the federal government.
How banks report your interest to the IRS
In January or early February each year, your bank sends you a Form 1099-INT showing the total interest you earned in the previous year. The bank also sends a copy to the IRS. This form is how the IRS knows you received that income.
You need to receive a 1099-INT only if you earned $10 or more in interest during the year. However, you must still report interest income even if you don't receive the form — if you earned $8 in interest and no form arrives, you still owe tax on that $8.
Keep your 1099-INT with your tax records. When you file your return, you'll enter the interest amount on Schedule 1 (Form 1040) or directly on your return, depending on which form you use. The exact line varies by year, so check the current IRS instructions.
What tax rate applies to savings interest
Savings account interest is taxed as ordinary income, meaning it's taxed at whatever rate applies to your overall income. If you're in the 22% tax bracket, interest is taxed at 22%. If you're in the 12% bracket, it's taxed at 12%.
This is different from long-term capital gains, which often get a lower tax rate. Interest does not receive that break — it's treated like regular income from a job.
Your total tax bill on interest depends on your other income sources. If you have a job, a pension, investment income, or other earnings, all of that gets added together to determine your bracket. Interest is just one piece of that total.
When you might owe taxes even without a 1099-INT
If you earned less than $10 in interest, your bank may not send you a 1099-INT. But you still owe tax on that interest. The IRS expects you to report it based on your own records — your bank statements or the interest notifications the bank sends throughout the year.
This is especially true if you have multiple savings accounts at different banks. One account might earn $8 and another $7, totaling $15 in taxable interest across both accounts. You need to add them all up and report the total.
Keep statements or screenshots showing interest deposits so you can verify the amount if the IRS ever asks. Most people won't face an audit over small interest amounts, but having documentation protects you.
How to report interest on your tax return
The steps depend on which tax form you file. If you use Form 1040 (the main individual income tax form), interest goes on Schedule 1, line 8 (though line numbers change yearly — always check current instructions). If you use a tax software program, it will ask you for interest income and put it in the right place automatically.
You'll need your 1099-INT or your own records showing the total interest earned. If you have multiple 1099-INTs from different banks, add them all together and report the total.
If you file a joint return with a spouse, interest earned in both names goes on the joint return. Interest in only one spouse's name goes on that spouse's portion of the return, though both spouses sign the same form.
State taxes on savings interest
Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, not wages). If you live in one of these states, you don't owe state income tax on your savings interest.
Every other state taxes interest as ordinary income, usually at the same rate as the federal government or sometimes higher. Some states offer small deductions or exemptions for interest earned by seniors or on certain types of accounts, but these are rare and vary widely.
When you file your state return, you'll report interest the same way you do on your federal return. Your state tax software or instructions will show you where to enter it.
Interest from high-yield savings accounts and money market accounts
High-yield savings accounts and money market accounts earn more interest than traditional savings accounts, but the tax treatment is identical. All interest is taxable income, regardless of how much the account earns or what the bank calls it.
If you earn $500 in interest from a high-yield account, you report all $500. The fact that you earned it faster than you would in a regular savings account doesn't change the tax rule.
This is worth knowing when comparing accounts. A high-yield account might earn 4% or 5% annually, while a regular savings account earns 0.01%. The higher interest is attractive, but remember that you'll owe tax on the full amount earned.
Frequently Asked Questions
Do I have to report interest if the amount is very small?
Yes. There is no minimum amount of interest that is tax-free. Even $1 in interest is taxable income. Your bank only sends a 1099-INT if you earn $10 or more, but you must still report smaller amounts based on your own records.
Can I deduct the taxes I pay on interest from the interest itself?
No. You report the full interest amount as income, then pay tax on it at your regular rate. You cannot subtract the tax you owe from the interest before reporting it. The interest and the tax are separate calculations.
What if I earned interest but didn't receive a 1099-INT?
Contact your bank and ask them to send it. If they confirm you earned less than $10 and won't send a form, use your bank statements to calculate the total interest and report it yourself. The IRS expects you to report all interest income regardless of whether you receive a form.
Is interest from a CD (certificate of deposit) taxed the same way?
Yes. CD interest is taxed as ordinary income just like savings account interest. You'll receive a 1099-INT from the bank if you earn $10 or more, and you report it the same way on your tax return.
Do I owe federal tax if I live in a state with no income tax?
Yes. Federal income tax and state income tax are separate. Even if your state has no income tax, you still owe federal tax on interest. You'll file a federal return and report the interest there, but you won't file a state return.