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 each year. How much tax you owe depends on your total income and tax bracket, not on the size of the account itself.
Most banks send you a form called a 1099-INT in January or February if your account earned $10 or more in interest during the previous year. You use that form to report the interest on your tax return. Some states also tax interest income, though the rules vary by state.
The bank does not withhold tax from your interest automatically — the money goes straight into your account. You are responsible for setting aside money to pay the tax when you file, or making quarterly estimated payments if the interest is large enough.
Key Takeaways
- Interest earned on a savings account is taxable income at the federal level, reported on Form 1099-INT if it reaches $10 or more in a year.
- The principal — the money you deposited — is never taxed, only the interest the bank pays you.
- Your tax rate on interest depends on your overall income and filing status, not on the account balance.
- Some states tax interest income and some do not; check your state's rules or ask your tax preparer.
- Banks do not automatically withhold tax from interest, so you need to account for it when you file or make estimated quarterly payments.
How the IRS treats savings account interest
The Internal Revenue Service classifies interest as ordinary income, the same category as wages or salary. That means it is taxed at your marginal rate — the tax bracket that applies to your highest dollars of income. If you earn $50,000 in wages and $500 in interest, that $500 is taxed at whatever rate applies to income between $50,000 and $50,500.
You report the interest on Form 1040, Schedule 1 (or Schedule B if you have more than $1,500 in interest from all sources). The bank reports it to the IRS on the 1099-INT, so the IRS already knows the amount. If you do not report it, the IRS will notice the mismatch.
Interest from a regular savings account, money market account, or certificate of deposit (CD) all count the same way. Interest from a high-yield savings account is taxed identically — the higher rate just means you owe more tax on it.
When you do not receive a 1099-INT
If your account earned less than $10 in interest during the year, the bank is not required to send you a 1099-INT. You still owe tax on that interest, and you still have to report it on your return — but you will not have the form to reference. Keep your own records of the interest earned by checking your year-end account statement or the interest posted each month.
Some banks send a 1099-INT even when interest is below $10, so check your mail in January and February. If you do not receive one and you know you earned interest, contact the bank and ask for a statement showing the total.
State income tax on savings interest
Whether you owe state tax on interest depends on where you live. Most states tax interest the same way the federal government does — as ordinary income. A few states do not tax income at all (including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming), so residents of those states owe no state tax on interest.
Some states offer tax breaks for interest earned on certain types of accounts or for people over a certain age. New York, for example, excludes interest on certain savings accounts for residents over 59½. Check your state's tax agency website or ask a tax preparer whether your state taxes interest and whether any exemptions apply to you.
How to report interest on your tax return
When you file your federal return, you will need the total interest from all your savings accounts, money market accounts, and CDs. If you have multiple accounts at different banks, add up all the 1099-INTs you receive.
On Form 1040, you report this total on Schedule 1, line 8b (or Schedule B if required). If you are filing electronically, your tax software will walk you through the entry. If you are filing by hand or working with a tax preparer, bring all your 1099-INTs and any statements showing interest earned on accounts that did not generate a form.
You do not need to report the interest separately for each account — just the total. The IRS receives copies of all your 1099-INTs directly from the banks, so they will cross-check your return against those forms.
What happens if you do not report interest income
The IRS receives a copy of every 1099-INT the bank sends to you. If your return does not include that interest, the IRS computer system flags it as a discrepancy. You may receive a notice asking you to explain the difference, or the IRS may simply add the unreported interest to your return and send you a bill for the additional tax, plus interest and penalties.
Even small amounts of unreported interest can trigger a notice. It is simpler and cheaper to report it correctly the first time. If you made a mistake on a prior return, you can file an amended return (Form 1040-X) to correct it.
Planning for taxes on high-yield savings
High-yield savings accounts currently pay much higher interest than traditional savings accounts — sometimes 4% or more annually. That means the tax bill is larger. If you have $10,000 in a high-yield account earning 4%, you will owe tax on $400 in interest. At a 24% federal tax rate, that is $96 in federal tax alone, plus state tax if your state taxes interest.
You do not have to withhold money from the account yourself, but you should set aside money from your regular income to cover the tax when you file. If the interest is substantial — more than a few hundred dollars — consider making quarterly estimated tax payments to the IRS so you do not owe a large bill in April.
Some people move money between accounts to manage their tax liability, but the tax applies to interest earned regardless of when you move the money. The timing of deposits and withdrawals does not change the tax on interest already earned.
Frequently Asked Questions
Do I have to pay taxes on money I transfer between my own accounts?
No. Moving money from one account to another is not income — it is just moving your own money around. You only pay tax on interest the bank pays you, not on transfers or deposits.
What if I earned interest but the bank did not send me a 1099-INT?
You still owe tax on it. Check your account statements to find the total interest earned, and report it on your return even without the form. Contact the bank if you need help calculating the total.
Can I avoid taxes by closing my savings account?
No. You owe tax on interest earned during the year regardless of when you close the account. Closing the account does not erase the tax obligation — it just means you will not earn any more interest going forward.
Is interest from a CD taxed differently than interest from a savings account?
No. Both are reported on a 1099-INT and taxed as ordinary income. The only difference is that CD interest is sometimes reported on a different line of the form, but it counts the same way on your tax return.
Do I need to make estimated quarterly tax payments on savings interest?
Only if your total tax liability for the year is high enough. If you expect to owe more than $1,000 in federal tax, the IRS recommends making quarterly payments. Ask a tax preparer whether you need to make them based on your specific situation.