The short answer: interest earned in a savings account is taxable income

Yes, the interest your savings account earns counts as income to the IRS. You owe federal income tax on it. Most states tax it too. The bank reports what you earned to both you and the IRS on a Form 1099-INT, and you report that same amount on your tax return. The tax rate depends on your overall income and tax bracket, not on the size of the account.

The principal—the money you deposited—is never taxed. Only the interest the bank pays you is taxable. If you put $10,000 in savings and earn $50 in interest over a year, you owe tax on the $50, not the $10,000.

Key Takeaways

  • Interest earned in any savings account is taxable federal income and must be reported on your tax return.
  • Banks send you a Form 1099-INT by January 31 each year showing all interest paid, and they send a copy to the IRS.
  • You report the interest amount on your tax return; the tax you owe depends on your tax bracket, not the account balance.
  • Most states tax savings account interest as income, though a few states do not tax interest income at all.
  • Interest below $10 may not trigger a 1099-INT, but you still owe tax on it if you had any other income that year.

When the bank reports your interest to the IRS

Your bank files a Form 1099-INT with the IRS and sends you a copy by January 31 of the year after you earned the interest. This form lists all interest paid to you during the previous calendar year. The IRS uses this to cross-check your tax return, so if you do not report the interest and the IRS sees it on the 1099-INT, you will likely get a notice.

If you earned less than $10 in interest at a single bank, that bank may not send you a 1099-INT. However, you still owe tax on that interest if you had any other income during the year. You can find the exact amount in your account statements or by logging into your online banking portal.

If you have accounts at multiple banks, you will receive a separate 1099-INT from each one. Add all the interest amounts together when you file your return.

How much tax you owe on savings interest

The tax rate on savings interest is the same as your ordinary income tax rate. It is not a special rate. If you are in the 22% tax bracket, you owe 22% of the interest as federal tax. If you are in the 12% bracket, you owe 12%. Your tax bracket is determined by your total income for the year, not by the savings account alone.

For example, if you earned $50,000 in wages and $200 in savings interest, your taxable income is $50,200. The $200 is taxed at whatever rate applies to that portion of your income, which depends on your filing status and other factors.

You may also owe Net Investment Income Tax (NIIT) of 3.8% on the interest if your modified adjusted gross income exceeds certain thresholds. For 2024, that threshold is $200,000 for single filers and $250,000 for married filing jointly. This is a separate tax on top of your regular income tax.

State taxes on savings account interest

Most states tax interest income as part of your state income tax return. The state tax rate varies by state and by your state tax bracket. A few states—including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—do not tax interest income at all, so residents of those states owe federal tax but no state tax on savings interest.

New Hampshire and Tennessee tax interest and dividend income but not wages. If you live in one of those states, you will owe state tax on your savings interest even though you do not owe state tax on your salary.

Check your state's tax authority website or your state tax return instructions to confirm whether your state taxes interest income and at what rate.

Reporting interest on your tax return

When you file your federal return, you report the interest income on Schedule 1 (Form 1040) in the section for interest income. If your total interest from all sources is $1,500 or less, you can report it directly on the main Form 1040 line for interest. If it exceeds $1,500, you must use Schedule B to itemize each source.

You do not need to attach the 1099-INT forms to your return, but keep them with your tax records for at least three years in case the IRS asks questions. Report the exact amount shown on the 1099-INT, or if you received no 1099-INT, report the interest you found in your bank statements.

If you file a state return, you will report the same interest amount on your state return as well, unless your state does not tax interest income.

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, which means you owe more tax on the earnings. The tax treatment is identical—the interest is fully taxable—but because the interest rate is higher, your tax bill is larger. A high-yield account earning 4% to 5% annually will generate significantly more taxable interest than an account earning 0.01%.

For example, $10,000 in a high-yield account at 4.5% earns $450 per year in taxable interest. At a 22% tax rate, you owe $99 in federal tax on that interest. The same $10,000 in a traditional savings account at 0.01% earns $1 per year and generates roughly $0.22 in tax.

This does not mean high-yield accounts are a bad choice—the after-tax earnings are still higher than traditional accounts. But factor the tax into your planning if you are comparing accounts or deciding where to keep money.

Tax-advantaged alternatives to regular savings accounts

If you want to save money without paying tax on the interest each year, consider accounts that defer or avoid tax on earnings. Roth IRAs and Roth 401(k)s allow you to earn interest and investment gains tax-free, though you must follow contribution limits and withdrawal rules. Traditional IRAs and 401(k)s defer the tax until you withdraw the money in retirement.

Certificates of Deposit (CDs) held in regular accounts are taxed the same way as savings accounts—the interest is fully taxable each year. However, CDs held inside an IRA or 401(k) are not taxed annually.

I Bonds (Series I Savings Bonds) issued by the U.S. Treasury earn interest that is not taxed by states, and you can defer federal tax until you cash the bond or it matures. This can be useful for long-term savings, though the interest rate changes every six months and there are withdrawal restrictions.

What to do if you did not receive a 1099-INT

If you earned interest but did not receive a 1099-INT, check your bank statements to find the exact amount. Log into your online account or call the bank's customer service line and ask for a statement showing all interest paid during the year. You are still required to report this interest on your tax return even without the form.

If you believe you should have received a 1099-INT and did not, contact the bank directly. They may resend it or provide a corrected version. If the bank made an error and reported the wrong amount to the IRS, ask them to file a corrected 1099-INT (Form 1099-INT with a "CORRECTED" box checked).

If you received a 1099-INT but the amount is wrong, do not ignore it. Contact the bank to request a correction, and keep documentation of your request. If you report a different amount on your tax return than what appears on the 1099-INT, include a written explanation with your return.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether the bank sends you a 1099-INT form. You still owe tax on any interest you earned, even if it is $1. Report it on your tax return based on your bank statements.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount on your tax return. Savings account fees are not deductible. However, if a bank charges you a fee that exceeds the interest earned, you still report the interest as income—the net result may be negative, but you cannot claim a loss.

What if I moved money between savings accounts during the year?

Moving money between your own accounts does not create taxable income. Only the interest the bank pays you is taxable. If you transferred $5,000 from one savings account to another, that transfer itself is not taxed. The interest earned on that $5,000 is taxed.

Do joint savings accounts get taxed differently?

A joint account's interest is taxed based on who owns it. If both owners contributed equally and own it equally, you typically split the interest income. The bank may report all interest to one owner's Social Security number on the 1099-INT, so coordinate with the other owner to make sure both of you report your share on your respective tax returns.

Is interest from a savings account at a credit union taxed the same way?

Yes. Credit unions report interest on Form 1099-INT just like banks do, and the interest is fully taxable federal and state income. The tax treatment is identical whether the account is at a bank, credit union, or online institution.