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 again. But the interest the bank pays you on that money counts as income to the IRS, and you owe federal income tax on it. Most states tax it too. The bank reports this interest to you and the IRS on a Form 1099-INT if you earn $10 or more in a year.

How much tax you pay depends on your total income and your tax bracket — the same way wages are taxed. If you earn $500 in savings interest and you're in the 22% tax bracket, you'll owe roughly $110 in federal tax on that interest (though state tax may apply on top). The interest is added to your other income when you file your tax return.

This is different from the principal — the money you put in. You never pay tax on your own money coming back to you. Only the interest the bank pays you is taxable.

Key Takeaways

  • Interest earned in a savings account is taxed as ordinary income at your federal tax rate and your state's rate if it has one.
  • Banks report interest of $10 or more per year on Form 1099-INT, which they send to you and the IRS by January 31.
  • You report this interest on your tax return even if the bank does not send you a 1099-INT, so keep your own records.
  • High-yield savings accounts earn more interest, which means you owe more tax, but the after-tax return is usually still higher than traditional savings accounts.
  • Money you deposit yourself is never taxed — only the interest the bank pays you is subject to tax.

When the bank sends you a 1099-INT form

If your savings account earned $10 or more in interest during the calendar year, your bank must send you a Form 1099-INT by January 31 of the following year. This form shows how much interest you earned. The bank sends a copy to the IRS at the same time, so the IRS knows about the income whether you report it or not.

If you earned less than $10, the bank may not send a 1099-INT, but you still owe tax on the interest. Check your year-end account statement to see how much interest posted. You'll need to report it on your tax return even if no form arrives.

Make sure the 1099-INT has your correct name and Social Security number. If it doesn't, contact the bank and ask them to file a corrected form (called a 1099-INT correction). Mismatched information can trigger IRS notices later.

How to report savings interest on your tax return

When you file your federal tax return, you report interest income on Schedule B (Form 1040) if you have more than $1,500 in taxable interest and dividends combined. If you have $1,500 or less, you can report it directly on Form 1040 line 2b without filing Schedule B.

Add up all interest from all sources — savings accounts, money market accounts, CDs, bonds, and any other interest-bearing accounts. Report the total on the appropriate line. The IRS matches this to the 1099-INT forms the banks sent them, so the numbers need to match.

If you file state income tax, you'll report the same interest there too (unless you live in a state with no income tax). Some states have different rules about what counts as taxable interest, so check your state's tax instructions or speak with a tax preparer if you're unsure.

The difference between federal and state tax on savings interest

Federal tax is owed on all savings interest no matter where you live. Your federal tax rate depends on your total income for the year and your filing status. The IRS publishes tax brackets each year, and your interest gets added to your other income to determine which bracket you fall into.

State income tax varies widely. 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). The other 41 states tax savings interest, but the rates and rules differ. Some states tax interest at the same rate as ordinary income; others have a flat rate or graduated brackets.

If you live in a state with income tax, you'll owe both federal and state tax on your savings interest. The total tax burden can be significant if you earn substantial interest, which is one reason some people consider moving savings to high-yield accounts in states with lower tax rates — though the tax savings usually don't outweigh the benefit of earning more interest in the first place.

Why high-yield savings accounts still make sense despite the tax

A high-yield savings account might earn 4% to 5% annual interest, while a traditional savings account earns 0.01% or less. Even after you pay tax on the higher interest, you come out ahead. If you earn $500 in interest at 4% and owe $110 in federal tax, you keep $390 — far more than the $2 you'd earn in a traditional account and keep after tax.

The tax is on the interest you earn, not on the higher rate itself. So the math still favors the account that pays more. The only time a traditional account makes sense is if you have no other place to put the money and the bank offers a sign-up bonus or other incentive.

Keep in mind that interest rates change. When rates are high, you earn more interest and owe more tax. When rates drop, both the interest and the tax burden fall. This is normal and expected.

How to reduce the tax on savings interest

You cannot avoid tax on savings interest, but you can reduce it by keeping some money in accounts that don't generate taxable interest. Money in a checking account earns little to no interest and generates no tax. Money in a Roth IRA grows tax-free and is never taxed when you withdraw it (as long as you follow the rules). Money in a 529 college savings plan grows tax-free if used for education.

If you have a large amount saved, spreading it across different account types can lower your overall tax bill. For example, putting $10,000 in a high-yield savings account and $10,000 in a Roth IRA means you only pay tax on the interest from the savings account, not the IRA.

Another strategy is to keep money in a regular savings account if you expect your income to drop in a future year. If you withdraw the money and report it as income in a lower-income year, you'll be in a lower tax bracket and owe less tax on any interest you earned. This works best if you know you're taking a sabbatical, retiring, or having a year with unusually low income.

What happens if you don't report savings interest

The IRS receives a copy of every 1099-INT your bank files. If you don't report the interest on your tax return, the IRS will notice the mismatch between what you reported and what the bank reported. This usually triggers a notice asking you to explain the difference or pay the tax you owe plus penalties and interest.

The penalty for not reporting income is typically 20% of the unpaid tax, plus interest that compounds daily. If the IRS determines you intentionally hid the income, the penalty can be as high as 75%. It's far cheaper to report the interest when you file, even if you can't pay the full tax right away — the IRS offers payment plans for people who owe.

If you made an honest mistake and forgot to report a small amount of interest, you can file an amended return (Form 1040-X) to correct it. The sooner you do this, the lower the penalties and interest will be.

Frequently Asked Questions

Do I have to report savings 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 $1 or $5. Check your account statement and report the actual amount on your tax return.

Is interest from a money market account taxed the same way as a savings account?

Yes. Money market accounts are treated the same as savings accounts for tax purposes. The interest is reported on a 1099-INT and taxed as ordinary income. The only difference is the account type and how the bank calculates interest.

What if I earned interest in multiple savings accounts?

Add up the interest from all accounts and report the total on your tax return. Each bank sends a separate 1099-INT if you earned $10 or more in that account. You'll receive multiple forms, but you combine them into one total when you file.

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

No. You report the gross interest the bank paid you, not the net after fees. However, if you paid investment-related fees (not account maintenance fees), you may be able to deduct them as miscellaneous itemized deductions, though this is rare for savings accounts and subject to income limits.

Does a CD earn interest that gets taxed the same way?

Yes. Certificate of Deposit interest is taxed as ordinary income just like savings account interest. The bank reports it on a 1099-INT. The only difference is that CDs lock your money up for a set term, so you earn interest over a longer period and may owe more tax.