You pay taxes only on the interest your savings account earns, not on the money you deposit
The money you put into your savings account is yours — you already paid taxes on it when you earned it as income. The IRS does not tax you again on the principal balance sitting in the account. However, banks pay you interest on that balance, and that interest counts as taxable income in the year you earn it.
How much interest you earn depends on the account's interest rate and how long the money sits there. A savings account earning 4% annual interest on $10,000 generates $400 in interest that year. That $400 is what you owe taxes on, not the $10,000.
The bank reports this interest to you and to the IRS on a Form 1099-INT each January. You then include that interest income on your tax return. The tax you owe depends on your overall income and tax bracket — the interest is added to your other income and taxed at your normal rate.
Key Takeaways
- Money you deposit into a savings account is not taxed because you already paid taxes on it as income.
- Interest earned on the account balance is taxable income and must be reported on your tax return.
- Banks send you a Form 1099-INT by January 31 showing all interest paid during the previous year.
- You report the interest amount on your tax return; the tax owed depends on your total income and tax bracket.
- High-yield savings accounts earn more interest, which means more taxable income, even though the interest rate is still modest.
How banks report interest to the IRS
Your bank tracks every dollar of interest it pays you throughout the year. By January 31, the bank sends you a Form 1099-INT showing the total interest earned in the previous calendar year. The bank also sends a copy to the IRS, so the agency knows how much interest income you received.
If you earned less than $10 in interest during the year, the bank may not be required to send you a Form 1099-INT, but you still owe taxes on that interest if you file a return. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one.
Keep the 1099-INT with your tax records. When you file your return, you report the interest income on Schedule 1 (Form 1040) or directly on your return, depending on the tax software or form you use. The interest gets added to your other income for the year.
What happens if you earn very little interest
If your savings account earns only a few dollars in interest, you still owe taxes on it — but the actual tax bill may be small. For example, if you earned $15 in interest and you are in the 22% tax bracket, you owe roughly $3.30 in federal income tax on that interest.
Some people with very low income may not owe any federal income tax at all, even if they earned interest. The standard deduction (the amount of income you can earn tax-free) is $13,850 for single filers in 2024 and $27,700 for married couples filing jointly. If your total income, including interest, falls below the standard deduction for your filing status, you owe no federal income tax.
However, you may still need to file a return to claim a refund of taxes withheld from paychecks or to claim tax credits like the Earned Income Tax Credit. Check the IRS filing requirements based on your age, income, and filing status.
Interest rates and how much you will owe in taxes
The amount of interest you earn depends on the account's annual percentage yield (APY) and your balance. A regular savings account at a traditional bank might pay 0.01% APY, while a high-yield savings account might pay 4% or higher. The higher the rate, the more interest you earn — and the more you owe in taxes.
Here is how the math works: if you keep $50,000 in a high-yield account earning 4.5% APY for a full year, you earn $2,250 in interest. If you are in the 24% tax bracket, you owe roughly $540 in federal income tax on that interest. That is still a net gain — you keep $1,710 after taxes — but it is important to understand that the interest is not tax-free.
Some states also tax interest income. The rate varies by state, and a few states do not tax interest at all. Check your state's tax rules to see whether state income tax applies to your savings account interest.
Certificates of deposit and money market accounts
Certificates of deposit (CDs) and money market accounts work the same way as savings accounts: you do not pay taxes on the principal, only on the interest earned. The bank reports CD interest on a Form 1099-INT just like savings account interest.
With a CD, you agree to leave money in the account for a set period (three months, one year, five years, and so on) in exchange for a fixed interest rate. If you withdraw the money early, you pay a penalty, but that penalty does not reduce your taxable interest — you still owe taxes on all the interest the CD earned, even if you pay a penalty to access it early.
Money market accounts are hybrid accounts that combine features of savings and checking accounts. They typically pay higher interest than regular savings accounts but may require a larger minimum balance. The interest is taxed the same way.
Tax-advantaged accounts that work differently
Some savings vehicles are designed to reduce or eliminate taxes on interest. A Roth IRA or Roth 401(k) allows you to save money and earn interest tax-free, as long as you follow the withdrawal rules. Money in these accounts grows without annual tax bills, and may have access to withdrawals in retirement are tax-free.
A traditional IRA or 401(k) defers taxes: you do not pay taxes on the interest while the money is in the account, but you pay income tax on withdrawals in retirement. A 529 college savings plan allows interest to grow tax-free if the money is used for may have access to education expenses.
These accounts have contribution limits, withdrawal rules, and other restrictions. They are not right for all situations, but if you are saving a large amount and want to minimize taxes on interest, they are worth exploring with a tax professional or financial advisor.
What to do when you receive your 1099-INT
When your 1099-INT arrives in January, check it for accuracy. Verify that the interest amount matches what your bank statement shows. If there is a discrepancy, contact the bank and ask for a corrected form.
Keep the 1099-INT until after you file your tax return and the IRS has processed it. If you file electronically, your tax software will guide you through entering the interest income. If you file by mail, attach the 1099-INT to your return or keep it with your records.
If you lose the 1099-INT, you can request a duplicate from your bank. You can also log into your online banking portal — many banks display the interest paid during the year in your account history or statements.
Frequently Asked Questions
Do I have to file a tax return if I only earned interest and no other income?
It depends on the amount of interest and your filing status. If your total income (including interest) is below the standard deduction for your age and filing status, you do not owe federal income tax. However, you may want to file anyway to claim refundable tax credits or recover withheld taxes. Check the IRS filing requirements for your situation.
What if I earned interest in multiple savings accounts?
Each bank sends you a separate Form 1099-INT for each account. You add up all the interest from all accounts and report the total on your tax return. The IRS receives copies of all your 1099-INTs, so they know your total interest income.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount shown on the 1099-INT. Fees charged by the bank are not deductible against interest income on your personal tax return, though they may reduce your net interest earnings.
Is interest from a joint savings account taxed differently?
The bank reports the full interest amount on a 1099-INT. If the account is jointly owned, you and the other owner must decide how to split the interest for tax purposes — usually 50/50, but it depends on your ownership agreement. Each person reports their share on their own tax return.
What if I moved money between accounts during the year?
The interest you earned is based on how long the money sat in each account. The 1099-INT shows the total interest paid by that bank during the year. If you moved money to a different bank, that bank sends a separate 1099-INT for the interest it paid. Report all 1099-INTs on your return.