Yes, you pay income tax on savings account interest, but only on the amount your bank pays you

The money you deposit into a savings account is yours and not taxed. The interest your bank pays you on that money is taxed as ordinary income by the federal government and by most states. If you earned $50 in interest over a year, you report that $50 as income on your tax return, just like wages or other earnings.

Your bank will send you a form called a 1099-INT (Interest Income) if you earned $10 or more in interest during the year. You use this form to report the interest on your federal tax return. Some states also require you to report savings interest on your state return, depending on where you live and how much you earned.

The tax rate you pay on savings interest depends on your total income and tax bracket. If you are in the 22% federal tax bracket, you pay roughly 22% tax on the interest. If you are in the 12% bracket, you pay roughly 12%. This is different from capital gains tax, which applies to stocks and investments — savings interest is taxed as regular income, which is usually higher.

Key Takeaways

  • Your bank reports savings interest to the IRS on a 1099-INT form if you earned $10 or more in a year.
  • You report this interest as ordinary income on your federal tax return, and it is taxed at your regular income tax rate.
  • Most states tax savings interest as income as well, though a few states do not tax interest income at all.
  • High-yield savings accounts earn more interest, which means you owe more tax, but the after-tax return is still usually higher than a regular savings account.

When your bank sends you a 1099-INT form

Your bank is required to send you a 1099-INT if the interest you earned reaches $10 or more in a calendar year. The bank sends this form to you and to the IRS by January 31 of the following year. If you earned less than $10, your bank does not have to send a 1099-INT, but you still owe tax on that interest if you file a return.

Check the 1099-INT carefully when you receive it. The amount in box 1 is the interest income you need to report. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. Add them all together when you file your return.

If you do not receive a 1099-INT by early February, contact your bank directly. You can usually download it from your online banking portal or call customer service to request a copy. Do not wait until tax time to ask for it — get it as soon as it is available so you have time to file accurately.

How to report savings interest on your tax return

On your federal return, you report savings interest on Schedule 1 (Form 1040) under "Interest." If you use tax software, it will ask you to enter the amount from your 1099-INT, and the software will put it in the right place automatically. If you file by hand or work with a tax preparer, give them all your 1099-INT forms.

The interest gets added to your other income, which may push you into a higher tax bracket if your total income crosses a threshold. For example, if you earn $50,000 in wages and $500 in savings interest, your taxable income is $50,500, and you pay tax on the full amount.

Some people with very low income may not owe federal tax at all, even if they earned interest. The standard deduction (the amount you can earn tax-free) changes each year. For 2024, a single person under 65 can earn up to $14,600 before owing federal tax. If your total income, including interest, is below that, you may not owe tax — but you should still file if you had taxes withheld from paychecks, because you might get a refund.

State income tax on savings interest

Most states tax savings interest as income, using the same 1099-INT form your bank sends to the IRS. A handful of states do not tax interest income at all: Alaska, Florida, Illinois, Indiana, Mississippi, Missouri, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you report the interest to the IRS but not to your state.

States that do tax interest usually tax it at your regular state income tax rate, which varies by state and income level. Some states have a flat rate (the same percentage for everyone), while others use brackets like the federal system. Check your state's tax authority website or ask a tax preparer what your state's rate is.

If you moved during the year, you may owe tax to two states. The state where you lived when you earned the interest usually gets the tax, but rules vary. If you are unsure, contact both states' tax departments or work with a preparer who knows your situation.

The difference between high-yield and regular savings accounts

A high-yield savings account pays more interest than a regular savings account — sometimes 4% or 5% per year, compared to 0.01% at a traditional bank. This means you earn more money, but you also owe more tax on that money. If you earn $500 in interest instead of $5, you report $500 to the IRS and pay tax on it.

Even after taxes, a high-yield account usually leaves you with more money than a regular account. If you are in the 22% federal tax bracket and earn $500 in interest, you owe about $110 in federal tax, leaving you $390. At a regular account earning $5, you owe about $1.10 in tax, leaving you $3.90. The high-yield account still wins by a large margin.

The tax does not change which account is the better choice for most people. It just means you should expect to report the interest and set aside money for taxes if you do not have taxes withheld automatically. Some high-yield accounts let you set up tax withholding, which means the bank holds back a percentage of your interest and sends it to the IRS on your behalf.

What happens if you do not report savings interest

The IRS receives a copy of every 1099-INT your bank sends to you. If you do not report the interest on your return, the IRS will notice the mismatch between what the bank reported and what you reported. This can trigger a notice asking you to explain the difference or pay the tax you owe plus penalties and interest.

The penalty for not reporting income is usually 20% of the unpaid tax, plus interest that compounds daily. If you owed $50 in tax and did not report it, you might end up owing $60 or more by the time the IRS catches up. It is much cheaper to report the interest when you file, even if you have to pay the tax.

If you made an honest mistake and did not report interest in a previous year, you can file an amended return for that year. The IRS generally does not penalize you if you correct the error yourself before they contact you. Use Form 1040-X to amend a prior-year return.

Strategies to reduce tax on savings interest

You cannot avoid paying tax on savings interest, but you can reduce how much interest you earn and therefore how much tax you owe. This sounds backwards, but it matters in specific situations. If you are close to a tax bracket threshold or close to losing a tax credit, earning less interest might save you more in taxes than the interest itself is worth.

For most people, this does not apply. A high-yield savings account is still the right choice because the after-tax interest is higher than a regular account. But if you have a very specific tax situation — for example, if you are on Social Security and extra income would cause your benefits to be taxed — talk to a tax preparer about whether your savings strategy makes sense.

Another option is to keep money in a Roth IRA or Roth 401(k) if you are saving for retirement. Interest earned inside these accounts is not taxed, and you do not report it on your return. The trade-off is that you cannot touch the money before retirement age without penalties. This works only if you do not need the money soon.

Frequently Asked Questions

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

Your bank does not have to send you a 1099-INT if you earned less than $10, but you still owe tax on that interest if you file a return. Report it on Schedule 1 of your Form 1040. If your total income is below the standard deduction, you may not owe tax even after reporting the interest.

What if I have savings accounts at multiple banks?

Each bank sends its own 1099-INT if you earned $10 or more at that bank. Add up all the interest from all your 1099-INT forms and report the total on your tax return. The IRS receives copies of all of them, so they will know if you miss one.

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

No. You report the full amount of interest your bank paid you, even if you paid fees that reduced your net earnings. Savings account fees are not deductible on your personal tax return. Some business accounts have different rules, but personal savings accounts do not.

Does a savings account affect my tax refund or credits?

Savings interest counts as income, which can affect refundable credits like the Earned Income Tax Credit (EITC) or the Child Tax Credit. If your interest pushes your income over the limit for a credit, you may lose part or all of it. This is rare unless you earn a lot of interest, but it is worth checking if you claim credits.

What if my bank reports the wrong amount on the 1099-INT?

Contact your bank immediately and ask them to issue a corrected 1099-INT. They will send the correction to you and to the IRS. Do not report the wrong amount on your return — wait for the corrected form. If you already filed with the wrong amount, file an amended return once you have the correct form.