Yes, you owe federal income tax on savings account interest

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 have to report it on your tax return and pay income tax on it at your ordinary tax rate. Your bank will send you a Form 1099-INT each January showing how much interest you earned the previous year, and you use that form to report the amount to the IRS.

How much tax you actually owe depends on your total income and your tax bracket. Someone in the 22% tax bracket pays roughly 22 cents in federal tax for every dollar of interest earned. Someone in the 12% bracket pays roughly 12 cents. The rate is the same whether the interest comes from a savings account, money market account, or certificate of deposit.

Most savings accounts earn so little interest that the tax bill is small. A $10,000 account earning 4% annually generates $400 in interest — roughly $88 to $176 in federal tax depending on your bracket. But if you have multiple accounts or larger balances, the tax adds up faster.

Key Takeaways

  • Savings account interest is taxable income and must be reported on your federal tax return using the Form 1099-INT your bank sends you.
  • You pay income tax on interest at your ordinary tax rate, which ranges from 10% to 37% depending on your total income and filing status.
  • State and local income taxes also apply to savings interest in most states, adding another 3% to 13% depending on where you live.
  • High-yield savings accounts earn more interest than traditional accounts, which means a larger tax bill — but you keep more money after taxes.
  • Interest earned in a tax-advantaged account like a Roth IRA or 529 plan is not taxed, even though the same interest would be taxed in a regular savings account.

When your bank sends you the 1099-INT form

Your bank is required to send you a Form 1099-INT by January 31 if you earned $10 or more in interest during the previous calendar year. The form shows the total interest paid to you and goes to both you and the IRS. You do not have to do anything to receive it — the bank sends it automatically.

If you earned less than $10, your bank may not send a 1099-INT, but you still owe tax on that interest. You report it on your tax return even without the form. If you have multiple accounts at different banks, you will receive a separate 1099-INT from each one.

When you file your tax return, you report the interest income on Schedule 1 (Form 1040) or directly on your return depending on the tax software you use. The IRS receives a copy of your 1099-INT from your bank, so they know how much interest you earned. Failing to report it can trigger an audit or penalty.

Federal tax rates on interest income

Interest income is taxed as ordinary income, meaning it uses the same tax brackets as your wages. The 2024 federal tax brackets range from 10% to 37% depending on how much total income you have and whether you file as single, married filing jointly, or another status.

If you are single and earn $47,025 to $100,529 in total income, you are in the 22% bracket. That means roughly 22 cents of every dollar of interest goes to federal tax. If you earn $11,601 to $47,150, you are in the 12% bracket. The brackets shift each year for inflation.

Interest income stacks on top of your other income. If you earn $50,000 in wages and $1,000 in interest, the IRS treats you as earning $51,000 total. That extra $1,000 may push you into a higher tax bracket, meaning you pay more tax on it than you would if you had no other income.

State and local taxes on savings interest

Most states tax savings account interest as income. The state tax rate varies widely: New York charges up to 10.9%, California up to 13.3%, and Texas charges nothing. Some states offer small exemptions for interest earned by retirees or people over a certain age, but most savers pay state tax on the full amount.

A few states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all. If you live in one of these states, you owe only federal tax on your interest. If you live elsewhere, add your state's income tax rate to your federal rate to find your total tax bill.

Some cities also tax income. New York City, for example, charges an additional 3.876% on top of state and federal tax. Check your state and local tax authority's website to find your exact rate, or ask your accountant.

How high-yield savings accounts change the tax picture

A high-yield savings account earns 4% to 5% annually, compared to 0.01% to 0.5% at a traditional bank. That means more interest — and a larger tax bill. A $50,000 high-yield account earning 4.5% generates $2,250 in annual interest, which costs roughly $495 to $832 in federal tax alone depending on your bracket.

The higher interest is still worth it for most people. After paying tax, you keep more money than you would in a low-yield account. A $50,000 balance earning 4.5% leaves you with roughly $1,418 to $1,755 after federal tax. The same balance in a 0.5% account leaves you with only $250 after tax.

The tax bill is the same whether you keep the money in the account or withdraw it. Interest is taxed in the year it is earned, not when you spend it. If you earn $2,250 in interest in 2024, you owe tax on it in 2024 even if you do not touch the money until 2025.

Tax-advantaged accounts that avoid interest taxation

Money held in a Roth IRA or Roth 401(k) grows tax-free. Interest earned in these accounts is never taxed, even when you withdraw it in retirement. A Roth IRA is limited to $7,000 per year in contributions (for people under 50 in 2024), but the interest compounds without any tax drag.

A 529 college savings plan also grows tax-free if the money is used for education expenses. Interest earned in a 529 is not taxed when you withdraw it to pay tuition, room and board, or books. If you withdraw money for non-education purposes, the interest portion is taxed plus a 10% penalty, but the contribution itself comes out tax-free.

A traditional IRA or 401(k) defers taxes — you do not pay tax on interest while the money is in the account, but you pay ordinary income tax when you withdraw it in retirement. This is different from a Roth, where withdrawals are tax-free.

If you have a large amount to save and want to minimize taxes, moving money into one of these accounts can save you hundreds or thousands in annual tax bills. The tradeoff is that these accounts have contribution limits and rules about when you can withdraw the money.

What to do if you earned very little interest

If you earned less than $10 in interest, your bank will not send you a 1099-INT. You still owe tax on that interest, but you report it yourself on your tax return. Most tax software will ask you to enter interest income even if you do not have a form.

If you earned between $10 and $600, you will receive a 1099-INT. Report the amount shown on the form. Do not try to estimate or round — use the exact figure from the form.

If you earned $600 or more in interest from a single bank, that bank must also report it to the IRS on a Form 1099-INT. If you earned $600 or more in interest across multiple banks, each bank reports separately. You add up all the 1099-INTs and report the total on your return.

Frequently Asked Questions

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

Yes. Even though your bank will not send a 1099-INT, you still owe tax on all interest earned. Report the amount on your tax return. Most tax software will prompt you to enter it.

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

No. You report the full interest amount shown on your 1099-INT. Fees are not deductible against interest income. However, some fees may be deductible as miscellaneous expenses if you itemize deductions, though this is rare for most savers.

What if my bank sent me a 1099-INT with the wrong amount?

Contact your bank immediately and ask them to issue a corrected form. Once corrected, the bank will send an amended 1099-INT to you and the IRS. Do not file your tax return until you have the correct form.

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

Yes. Money market accounts, savings accounts, and certificates of deposit all report interest on Form 1099-INT and are taxed as ordinary income at your regular tax rate.

Do I owe tax on interest if I move money between accounts?

No. Moving money between your own accounts is not a taxable event. You only owe tax on the interest the money earns, not on transfers or withdrawals of your principal.