You pay income tax on interest your savings account earns, but not on the money you deposit

The money you put into a savings account is yours and not taxed again. The interest the bank pays you on that balance, however, counts as income to the IRS and your state tax authority. You report it on your tax return the same way you report wages or other income. The bank sends you a form called a 1099-INT each January showing how much interest you earned the previous year, and you use that number when you file taxes.

The tax rate on savings interest depends on your overall income and tax bracket — it is taxed as ordinary income, not at a special rate. If you earned $500 in interest and you are in the 22% federal tax bracket, you would owe roughly $110 in federal tax on that interest (plus any state income tax). The amount of tax you actually owe also depends on whether you have other deductions or credits that lower your taxable income.

Key Takeaways

  • Banks report savings interest to the IRS on Form 1099-INT, which you receive by January 31 each year.
  • Interest income is taxed as ordinary income at your marginal tax rate, not at a reduced rate.
  • You do not owe tax on the principal (the money you deposited), only on the interest earned.
  • If you earned less than $10 in interest during the year, the bank may not send you a 1099-INT, but you still owe tax on that interest if you file a return.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means higher tax liability on that interest.

When the bank reports your interest to the IRS

Your bank is required to send you a 1099-INT form by January 31 if you earned $10 or more in interest during the previous calendar year. The form shows the total interest paid to your account. The bank also sends a copy to the IRS, so the agency knows you earned that income.

If you earned less than $10, the bank does not have to send you a form, but you are still required to report that interest on your tax return if you file one. The IRS tracks accounts and cross-references reported income, so underreporting interest — even small amounts — can trigger a notice.

Some banks offer multiple savings products (money market accounts, certificates of deposit, individual retirement accounts). Each one may generate its own 1099-INT if interest exceeded $10, so you may receive more than one form from the same bank.

How interest income affects your tax bracket

Interest is added to your other income — wages, self-employment income, capital gains — to determine your total taxable income for the year. That total then determines which tax bracket you fall into. If you earned $60,000 in wages and $2,000 in savings interest, your taxable income is $62,000 (before deductions and credits).

The higher your total income, the higher your tax rate on that interest. If you are in the 12% bracket, you pay 12% federal tax on the interest. If you are in the 24% bracket, you pay 24%. This is why high earners pay more tax on savings interest than lower earners do, even if they earned the same dollar amount of interest.

Some people use deductions — the standard deduction or itemized deductions — to lower their taxable income. If your deductions are large enough, they may reduce the amount of interest income that is actually taxed.

State income tax on savings interest

Most states that have an income tax also tax savings interest at your state tax rate. A few states do not tax interest income at all. New Hampshire and Tennessee, for example, do not tax interest or dividend income. Some states offer tax breaks for retirees or people over a certain age.

Your state tax return will ask you to report the same interest income shown on your federal 1099-INT. You report it on your state return the same way you do on your federal return. If you live in a state with no income tax, you owe no state tax on the interest, but you still owe federal tax.

If you moved during the year or worked in a state different from where you live, you may need to file returns in multiple states. Each state taxes interest earned while you lived there or worked there, depending on state rules.

The difference between savings accounts and other accounts

A regular taxable savings account generates a 1099-INT for interest earned. A traditional IRA or 401(k) does not — interest and growth inside these accounts are not taxed until you withdraw the money in retirement. A Roth IRA is not taxed at all when you withdraw it, as long as you follow the rules.

A 529 college savings plan also grows tax-free if the money is used for education. A Health Savings Account (HSA) grows tax-free if used for medical expenses. These accounts are designed to let your money grow without annual tax bills, which is why they are popular for long-term saving.

If you have money in both a regular savings account and a tax-advantaged account, only the regular savings account interest appears on a 1099-INT. The tax-advantaged accounts handle taxes differently and do not generate this form.

What to do when you receive your 1099-INT

When you get your 1099-INT in the mail or online, check it for accuracy. Verify that the interest amount matches what your bank statements show. If there is an error, contact your bank and ask them to issue a corrected form (called a 1099-INT correction).

Keep the 1099-INT with your tax records. When you file your return, you will enter the interest amount on Schedule 1 (Form 1040) or on the interest income line of your state return, depending on which form you use. If you use tax software, it usually has a place to enter this information, and the software calculates the tax impact.

If you have multiple 1099-INT forms from different banks or accounts, add up all the interest amounts and report the total on your return. You do not file separate forms for each account — you combine them into one line item.

Strategies to reduce tax on savings interest

The most straightforward way to reduce tax on savings interest is to earn less interest — which means keeping less money in a regular savings account. Moving money to a tax-advantaged account like a Roth IRA or 529 plan means that interest grows without generating annual tax bills.

If you are retired or have low income, you may not owe any tax on interest if your total income is below the standard deduction. A single person under 65 with only savings interest income owes no federal tax if that interest is under $13,850 (the 2023 standard deduction; this amount changes each year).

Some people use a strategy called "laddering" certificates of deposit (CDs) — buying CDs that mature in different years — to spread interest income across multiple tax years and potentially stay in a lower bracket. This is a longer-term approach and works best if you have a large amount to invest.

Frequently Asked Questions

Do I have to file a tax return if I only have savings interest income?

You must file a return if your income exceeds the standard deduction for your age and filing status. For 2023, a single person under 65 with only interest income must file if that interest exceeded $13,850. If you earned less, you do not have to file federally, though you may want to if taxes were withheld from other income.

What if my bank did not send me a 1099-INT but I earned interest?

If you earned less than $10, the bank is not required to send a form, but you still owe tax on that interest. Report it on your return anyway. If you earned $10 or more and did not receive a form by February 15, contact your bank and ask for one.

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

No. You report the full interest amount shown on the 1099-INT. Account fees are not deductible against interest income on your personal tax return. However, if you are self-employed and use a savings account for business, some fees may be deductible as a business expense.

Does interest earned in a joint account get split between both owners for tax purposes?

The bank reports the full interest amount on a 1099-INT to whoever is listed as the account owner or primary account holder. If the account is truly joint and both people contributed equally, you may need to split the interest on your individual returns, but the bank's form will show it all under one name. Check with a tax professional about how to handle this on your return.

What happens if I move to a state with no income tax after earning interest in a state that does?

You owe state tax on interest earned while you lived in the state that taxes it. When you file your return for the year you moved, you may need to file a part-year return in the old state and a part-year return in the new state, depending on each state's rules. Your tax software or a tax professional can help you figure out which state gets which portion of your income.