You pay federal 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 — you do not owe tax on it. But the interest the bank pays you counts as income, and you report it on your federal tax return. The IRS treats savings account interest the same way it treats wages or freelance income: it is money you earned, so it is taxable.
How much tax you actually owe depends on your total income for the year and your tax bracket. If your savings account earned $50 in interest and that is your only income source, you will owe less tax than someone earning $50,000 in salary plus $50 in interest. The interest itself is taxable; the amount of tax varies by your situation.
Your bank will send you a Form 1099-INT each January if your account earned $10 or more in interest during the previous year. You use this form to report the interest on your tax return. If you earned less than $10, the bank may not send a form, but you still owe tax on the interest — you have to track it yourself and report it.
Key Takeaways
- Interest earned in a savings account is taxable income at the federal level; the principal (money you deposited) is not.
- Your bank sends Form 1099-INT if interest reaches $10 or more in a year, and you report this amount on your tax return.
- Some states tax savings account interest and some do not, so check your state's rules if you live outside a no-income-tax state.
- High-yield savings accounts earn more interest, which means you will owe more tax, but the after-tax return is usually still better than traditional savings.
How the IRS counts savings account interest
The IRS counts all interest your savings account earns as ordinary income. This means it is taxed at your regular income tax rate, not at a lower capital gains rate. If you are in the 22% tax bracket, interest is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%.
Interest compounds — meaning the bank pays you interest on your interest — but you still report only the total interest earned during the year. You do not report it as it accrues each month; you report the year-end total on your tax return. The Form 1099-INT your bank sends shows this total.
If you have multiple savings accounts at different banks, each bank that paid you $10 or more in interest will send a separate Form 1099-INT. You add up all the interest from all the forms and report the total on your return.
State taxes on savings account interest
Nine states do not tax income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, but is phasing that out by 2024). If you live in one of these states, you owe no state tax on your savings interest.
Every other state taxes savings account interest as ordinary income, using the same method as the federal government. Some states have their own Form 1099-INT reporting requirement; others rely on the federal form. Check your state's tax authority website or your state tax return instructions to see whether you need to report the interest separately or if it flows through automatically.
If you live in a state that taxes interest and your account earned $10 or more, you will report the interest on both your federal return and your state return. The amount is the same; you are just filing it in two places.
When you do not owe tax on savings account money
You do not owe tax on the principal — the money you put in. If you deposit $5,000 and later withdraw $5,000, that withdrawal is not taxable income. You are taking back your own money.
You also do not owe tax on transfers between your own accounts. Moving $1,000 from a savings account to a checking account is not a taxable event. The money was already yours; you are just moving it.
If you close a savings account and the bank pays you the balance, that is not taxable either — unless the balance includes interest you have not yet reported. The interest portion is still taxable; the principal is not.
High-yield savings accounts and tax liability
High-yield savings accounts currently pay 4% to 5% annual interest, compared to 0.01% or less at traditional banks. This means a $10,000 deposit earns $400 to $500 per year instead of $1. You will owe more tax on the interest, but the after-tax return is still significantly higher than a traditional account.
For example, if you are in the 22% federal tax bracket and your state taxes at 5%, you owe 27% total tax on the interest. A $10,000 deposit in a 5% high-yield account earns $500, and you owe $135 in tax, leaving you with $365 in after-tax gain. The same deposit in a 0.01% traditional account earns $1 and you owe $0.27 in tax, leaving you with $0.73. The high-yield account is still far ahead.
If you are concerned about the tax impact, you can reduce it by holding the account in a tax-advantaged structure like an IRA or 529 plan, where interest grows tax-deferred or tax-free. But for a regular taxable savings account, the interest is always taxable regardless of the rate.
Reporting interest on your tax return
When you file your federal return, you report savings account interest on Schedule B (Interest and Ordinary Dividends) if you earned more than $1,500 in interest and dividends combined. If you earned $1,500 or less, you can report it directly on Form 1040 without using Schedule B.
You will need the Form 1099-INT your bank sent you. The form shows the account number, the bank's name, and the total interest paid. You enter this amount on the appropriate line of your return. If you earned interest from multiple banks, you add all the 1099-INT amounts together and report the total.
If you earned less than $10 in interest and your bank did not send a Form 1099-INT, you still report the interest. You have to track it yourself — check your account statements or ask the bank for a year-end interest summary. Report the amount even if you do not have an official form.
What happens if you do not report savings account interest
The IRS receives a copy of every Form 1099-INT your bank sends. If you do not report the interest on your return, the IRS will notice the discrepancy. They may send you a notice asking you to pay the tax owed plus penalties and interest.
The penalty for not reporting income is typically 20% of the unpaid tax, plus interest that accrues daily. If you owed $30 in tax on $100 of interest and did not report it, you could end up owing $36 or more by the time penalties and interest are added. It is much cheaper to report the interest when you file.
If you made an honest mistake and report the interest in a later year, the IRS is usually willing to waive penalties if you have a clean history. But if you intentionally hide income, the penalties are steeper and can include criminal charges in extreme cases.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. The $10 threshold only determines whether your bank sends a Form 1099-INT. You still owe tax on any interest you earned, even if it is $1. Track it from your account statements and report it on your return.
Can I deduct savings account fees from the interest I report?
No. You report the gross interest the bank paid you, not the interest minus fees. Savings account fees are not tax-deductible for most people. You report the full interest amount on your return.
What if I earned interest but closed the account before the end of the year?
You still owe tax on the interest you earned up to the date you closed it. The bank will report the interest on Form 1099-INT for the year you earned it, regardless of when you closed the account. Report it on your return for that tax year.
Is interest from a money market account taxed the same way as savings account interest?
Yes. Money market accounts are treated identically to savings accounts for tax purposes. The interest is ordinary income, reported on Form 1099-INT, and taxed at your regular income tax rate.
Do I owe tax on interest if I am a dependent on someone else's return?
Yes. Interest is your income, not your parents' or guardian's income. You report it on your own return. If you are a dependent and your interest is under a certain threshold (which varies by year), you may not have to file a return, but if you do file, you report the interest.