Interest income is taxable at the federal level and in most states

Yes, you owe federal income tax on interest your savings account earns. The IRS treats savings account interest as ordinary income, which means it gets taxed at your regular income tax rate — not at a lower capital gains rate. If your account earned $50 in interest over the year, that $50 counts as income you have to report.

Most states also tax savings account interest as part of your state income tax, though a handful do not. New Hampshire and Tennessee do not tax interest income at all. If you live in any other state with an income tax, you will owe state tax on the interest as well as federal tax.

The bank or credit union holding your account does not withhold taxes automatically. You are responsible for reporting the interest when you file your tax return, even if nobody sends you a bill or a notice.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax rate, whether that rate is 10%, 22%, 24%, or higher.
  • You will receive a Form 1099-INT from your bank if the account earned $10 or more in interest during the year, though you owe tax on smaller amounts too.
  • Most states tax savings interest as part of state income tax, except New Hampshire and Tennessee.
  • The amount you owe depends on your total income for the year and your tax bracket, not on the interest amount alone.

How the IRS finds out about your interest income

Banks report interest to the IRS using a Form 1099-INT. If your account earned $10 or more in interest during the calendar year, your bank must send you a copy of this form by January 31 of the following year. The form shows the exact amount of interest the account generated.

The IRS receives a copy of the same form, so they know what interest you earned. This is why you cannot simply ignore interest income — the IRS will notice if you do not report it on your tax return.

If you earned less than $10 in interest, the bank may not send you a 1099-INT, but you still owe tax on that interest. You will need to add it to your return based on your account statements or the bank's online records.

What tax rate applies to your interest income

Your interest income is taxed at your marginal tax rate — the tax bracket you fall into based on your total income for the year. If you earn $50,000 as a single filer, you are in the 22% federal tax bracket, so interest income gets taxed at 22%. If you earn $200,000, you are in the 35% bracket, and interest gets taxed at 35%.

This means the tax you owe on interest depends on how much other income you have, not just on the interest amount. A person earning $30,000 a year who gets $500 in interest pays less tax on that interest than a person earning $150,000 who gets the same $500.

Your state tax rate works the same way — it applies to your total income, including the interest, and varies by state. Some states have a flat tax rate (like Colorado at 4.4%), while others use brackets like the federal system.

When you have to report interest on your tax return

You report interest income on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in total interest and dividends for the year. If you have $1,500 or less, you can report it directly on your Form 1040 without using Schedule B.

The interest goes into your total income for the year, which means it can push you into a higher tax bracket. If you were close to the edge of a bracket, even a small amount of interest can increase your tax bill.

You report this interest whether you filed a 1099-INT or not. If the bank did not send you one because the interest was under $10, you still add it to your return based on your statements.

High-yield savings accounts and tax liability

High-yield savings accounts pay significantly more interest than traditional savings accounts — sometimes 4% to 5% annually instead of 0.01%. This means the tax bill is larger, even though the account itself is still tax-free in the sense that you do not pay tax on the money you deposit, only on what it earns.

If you have $50,000 in a high-yield account earning 4.5%, you will earn about $2,250 in interest over the year. At a 22% federal tax rate, that is roughly $495 in federal tax owed. At a 5% state rate, add another $112. The after-tax return is lower than the advertised rate.

This does not mean high-yield accounts are a bad choice — they still beat traditional accounts even after taxes. But it is worth understanding that the interest rate advertised is the gross rate before taxes.

How to reduce the tax impact of savings interest

You cannot avoid tax on savings interest, but you can structure your savings to minimize it. One approach is to use a Roth IRA or Roth 401(k) if you are under the income limits. Interest earned inside these accounts is not taxed at all, ever — you pay tax on the money going in, but the growth is tax-free.

A traditional IRA or 401(k) defers the tax: you do not pay tax on the interest while it sits in the account, but you pay tax on withdrawals later. This can be useful if you expect to be in a lower tax bracket in retirement.

For savings outside retirement accounts, there is no way to avoid the tax, but you can be strategic about which account holds your money. Money you need within a few years might go in a regular savings account. Money you will not touch for decades might go in a taxable brokerage account holding stocks or bonds, which can have lower tax rates than interest income.

Frequently Asked Questions

Do I owe taxes on interest if I did not withdraw the money?

Yes. The IRS taxes interest in the year it is earned, not in the year you withdraw it. If your account earned $100 in interest in 2024, you owe tax on that $100 in 2024, even if the money stays in the account.

What if I have multiple savings accounts at different banks?

You add up all the interest from all your accounts and report the total. Each bank sends you a separate 1099-INT if the account earned $10 or more, but you combine them on your tax return.

Can I deduct savings account fees from the interest income?

No. You report the full interest amount as income. Savings account fees are not deductible on your personal tax return (though they may be deductible if the account is for a business).

What happens if I move money between my own savings accounts?

Transfers between your own accounts are not taxable. Only the interest the money earns is taxed. Moving $10,000 from one account to another creates no tax event.

Do I owe taxes on interest if I am under 18?

Yes, minors owe tax on interest income just like adults. A parent or guardian may be able to report the child's interest on their own return if the amount is small enough, but the interest is still taxable.