Yes, you pay federal income tax on savings account interest, and sometimes state tax too

The interest your bank pays you on a savings account counts as taxable income. The IRS treats it the same way it treats wages or other money you receive — you owe federal income tax on the full amount. Most banks will send you a Form 1099-INT in January showing how much interest you earned the previous year, and that number goes on your tax return.

Whether you also owe state income tax depends on where you live. Most states with an income tax tax savings interest the same way the federal government does. A handful of states — including Pennsylvania, Illinois, and Mississippi — do not tax interest income at all, which is one reason some people move their savings there or keep accounts open in those states.

The tax is owed whether the interest is small or large. If you earned $5 in interest, you report it. If you earned $500, you report that too. The bank does not withhold the tax automatically — you pay it when you file your return or make quarterly estimated payments if you have a lot of interest income.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax rate, which ranges from 10% to 37% depending on your total income.
  • Your bank sends you a Form 1099-INT by January 31 each year showing the interest you earned, and you must report this on your tax return.
  • Most states with income tax also tax savings interest, but a few states do not tax interest income at all.
  • You do not owe tax on the money you put into the account itself — only on the interest the bank pays you.
  • If you earn less than $10 in interest in a year, the bank may not send you a 1099-INT, but you still owe tax on that amount if you file a return.

How the tax is calculated based on your income bracket

The tax rate you pay on savings interest depends on your total income for the year, not just the interest. If you earn $35,000 in wages and $200 in savings interest, your total taxable income is $35,200. The interest gets taxed at whatever bracket that total income puts you in.

For 2024, federal tax brackets range from 10% for the lowest earners to 37% for the highest. This means a person in the 22% bracket pays 22 cents in federal tax on every dollar of interest, while someone in the 35% bracket pays 35 cents. The interest does not get its own separate rate — it stacks on top of your other income.

State tax works the same way in most states. If your state has a 5% income tax, you owe 5% of the interest to the state. Some states have progressive brackets like the federal system, so the rate varies based on your total income there too.

When you receive the 1099-INT and what to do with it

Banks and credit unions send Form 1099-INT to customers who earned $10 or more in interest during the calendar year. The form arrives by January 31 and shows the interest amount in Box 1. You receive a copy and the IRS receives a copy, so the agency knows what you earned even if you do not report it.

You report the interest on your tax return using Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest income, or you can report it directly on Form 1040 if you have less. The amount goes into the "Interest" line of your return, and it increases your taxable income for the year.

If you earned interest but did not receive a 1099-INT because it was under $10, you still owe tax on it. Keep your own records of the interest — most banks show it on your monthly statements or annual summary — and report it on your return anyway.

High-yield savings accounts and money market accounts have the same tax treatment

A high-yield savings account pays more interest than a traditional savings account, but the tax works identically. If you earn $500 in a high-yield account instead of $50 in a regular account, you report $500 on your tax return instead of $50. The higher rate is not a tax advantage — it just means more interest income to report.

Money market accounts, which are hybrid products that combine features of savings and checking accounts, also send 1099-INT forms and are taxed as ordinary income. The same applies to certificates of deposit (CDs), even though you cannot touch the money until maturity. You owe tax on the interest in the year it is credited to your account, not when you withdraw the CD.

This is why some people use tax-advantaged accounts like IRAs or 401(k)s for savings — the interest inside those accounts is not taxed each year. But regular savings accounts, no matter how much interest they pay, are taxed annually.

Strategies to reduce the tax impact of savings interest

The most straightforward way to reduce tax on savings is to keep less money in taxable savings accounts. Money in a traditional IRA or 401(k) grows without annual tax, and withdrawals are taxed later (or not at all if it is a Roth account). If you have $50,000 earning 4% interest in a regular savings account, you owe tax on $2,000 each year. That same $50,000 in a Roth IRA earns interest tax-free.

If you are retired or have low income, you might owe little or no tax on savings interest because your total income is below the standard deduction. A single person with no other income can earn up to $14,600 in 2024 before owing federal tax, so if all your income is savings interest under that amount, you owe nothing.

Some people also use I Bonds (Series I Savings Bonds), which are issued by the U.S. Treasury. The interest on I Bonds is not taxed by states, only by the federal government, and you can defer federal tax until you cash the bond. This does not eliminate tax but can delay it.

What happens if you do not report savings interest on your tax return

The IRS matches 1099-INT forms sent by banks against tax returns filed by customers. If you earned $300 in interest and received a 1099-INT but did not report it on your return, the IRS will notice the discrepancy. The agency may send you a notice asking for the tax owed, plus penalties and interest on the unpaid amount.

The penalty for not reporting income is usually 20% of the underpaid tax, though it can be higher if the IRS determines the omission was intentional. Interest accrues on the unpaid tax from the original due date, compounding daily. A small oversight on $50 in interest can turn into $20 or $30 in penalties and interest if it goes unresolved for a few years.

If you made an honest mistake, you can file an amended return (Form 1040-X) to correct it. The sooner you do this, the less interest accrues. The IRS is generally more lenient with people who correct errors themselves than with people who wait to be caught.

Frequently Asked Questions

Do I owe tax on savings interest if I am a minor or dependent?

Yes, minors owe tax on savings interest just like adults do. However, a dependent with interest income under $14,600 in 2024 may not owe federal tax if that is their only income. Some states have different thresholds for dependents. A parent or guardian should report the interest on the dependent's return or file a separate return for the minor if required.

What if I move money between savings accounts — is that taxed?

No. Moving money from one account to another is not a taxable event. You only owe tax on the interest the bank pays you, not on transfers of your own money. If you move $10,000 from Savings Account A to Savings Account B, there is no tax. If Account A paid you $50 in interest before you moved it, you owe tax on that $50.

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

No. You report the full interest amount on your tax return. Fees you pay to the bank are not deductible against the interest. However, if a bank charges you a fee and credits you interest in the same month, the net amount is what shows on your statement and what the bank reports to the IRS on the 1099-INT.

Is interest from a joint savings account split between the owners for tax purposes?

Not automatically. The bank reports the full interest amount on a 1099-INT to whoever is listed as the primary account holder, or it may split the interest between joint owners depending on the bank's policy. You and the other owner should clarify with the bank how interest will be reported, and then report your share on your own tax return. If the bank reports all interest to one person, that person may need to file an amended return or provide documentation to the IRS showing how the interest was actually split.

Do I owe tax on interest if the account is in a trust?

Yes, but the tax is owed by the trust, not by you personally. A trust files its own tax return (Form 1041) and reports interest income there. The trustee handles the tax obligation. If the trust distributes income to beneficiaries, those beneficiaries may owe tax on their share. This is complex and depends on the trust's structure, so consult a tax professional if you are a trustee or beneficiary of a trust with savings accounts.