You pay federal income tax on interest your savings account earns, but not on the money you deposit
The deposits you put into a savings account are not taxable — that is money you already earned and paid taxes on. The interest the bank pays you on that balance, however, is new income, and the IRS treats it as taxable interest income. You will owe federal income tax on that interest at your ordinary income tax rate, which depends on your total income for the year.
Whether you actually have to file a tax return and report that interest depends on how much you earned and your filing status. If your interest income is small, you may not be required to file at all. But if you do file, you must report all interest income, no matter how small.
Some states also tax savings account interest, and some do not. A few states exempt interest income entirely, while others tax it the same way the federal government does. Your state's rules are separate from federal rules, so you may owe state tax even if your federal tax is zero.
Key Takeaways
- Interest earned in a savings account is taxable income at the federal level; the original deposits you made are not.
- You must report all interest income on your federal tax return if you file, regardless of the amount.
- The bank will send you a Form 1099-INT if you earned $10 or more in interest during the year, but you owe tax on smaller amounts too.
- State income tax on savings interest varies by state — some states do not tax it, while others tax it like the federal government does.
- If your only income is interest and it falls below the filing threshold for your age and status, you may not have to file a federal return.
How the IRS counts savings account interest as income
The IRS classifies savings account interest as taxable interest income. This is separate from capital gains or other types of income. When your bank credits interest to your account, that is income you received in that tax year, even though you did not withdraw it or do anything with it.
Interest is taxed at your ordinary income tax rate, which is the same rate applied to wages, salary, and most other income. If you are in the 22 percent tax bracket, for example, your interest income is taxed at 22 percent. The rate depends on your total income for the year, not just the interest.
You report interest income on your federal tax return using Schedule B (if you have more than $1,500 in interest) or directly on Form 1040 (if you have $1,500 or less). The bank reports what it paid you using Form 1099-INT, which you receive by January 31 of the following year if you earned $10 or more.
When you must file a return to report savings interest
The IRS sets a filing threshold — a minimum income level below which you do not have to file a return. This threshold varies by age, filing status, and type of income. For 2024, a single person under 65 with only interest income must file if their interest exceeded $14,600. A married couple filing jointly with only interest income must file if their combined interest exceeded $29,200.
These thresholds change each year, and they are higher for people age 65 and older. If you have other income besides interest — wages, self-employment income, or capital gains — your threshold is lower, and you may be required to file even if your interest alone would not trigger a filing requirement.
Even if you do not have to file, you may want to file anyway if you had taxes withheld from other income or if you are may have access to to a refundable tax credit. Filing can result in a refund even if you had no tax liability.
Form 1099-INT and what it means for your taxes
Your bank sends you a Form 1099-INT by January 31 if you earned $10 or more in interest during the previous year. This form lists the total interest paid to you and is also sent to the IRS. The IRS uses this form to cross-check your tax return and make sure you reported the interest.
If you earned less than $10 in interest, the bank does not have to send you a 1099-INT, but you still owe tax on that interest if you file a return. Some banks send a 1099-INT anyway even for small amounts, so check your mail carefully. If you do not receive one and you earned interest, you can contact the bank and ask for a statement showing the interest paid.
The 1099-INT will show interest in Box 1 (interest income) and may show other information like early withdrawal penalties or U.S. savings bond interest. Report the amount from Box 1 on your tax return. If the 1099-INT shows an amount you believe is wrong, contact the bank first to verify before filing your return.
State income tax on savings account interest
State tax treatment of savings interest varies widely. Some states do not tax interest income at all — these include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Other states tax interest the same way the federal government does, at your ordinary income tax rate. A few states have special rates or exemptions for certain types of savings.
If you live in a state that taxes interest, you will report it on your state income tax return using a form similar to the federal Schedule B or directly on the state return. The filing threshold for state taxes may be different from the federal threshold, so you could be required to file a state return even if you do not have to file federally.
If you moved during the year or have accounts in multiple states, state tax can become complicated. Some states tax based on where you lived when you earned the interest, while others tax based on where you live on December 31. Check your state's tax agency website or contact them directly if you are unsure.
High-yield savings accounts and tax liability
High-yield savings accounts pay significantly more interest than traditional savings accounts — sometimes 4 to 5 percent annually compared to 0.01 percent or less at large banks. This higher interest means higher taxable income and potentially higher tax liability. A $50,000 balance in a high-yield account earning 4.5 percent generates about $2,250 in taxable interest per year, compared to almost nothing in a traditional account.
The tax treatment is identical to a regular savings account — all interest is taxable at your ordinary income tax rate. The bank will send you a 1099-INT just the same. The advantage of a high-yield account is that even after taxes, you keep more of your money than you would in a low-yield account, but you should factor the tax impact into your planning.
Some people use high-yield savings accounts as part of a tax strategy, such as holding them in a retirement account (IRA or 401k) where interest grows tax-deferred, or in a child's account if the child's income is below the filing threshold. These strategies require careful planning and may have other rules or limits.
What to do if you earned interest but did not receive a 1099-INT
If you earned $10 or more in interest and did not receive a 1099-INT by early February, contact the bank directly. Ask for a statement showing the interest paid during the year. The bank may send the form late, or it may have been mailed to an old address if you moved.
If the bank confirms you earned interest but cannot locate the 1099-INT, ask them to issue a corrected or duplicate form. Keep a record of this communication. When you file your return, report the interest amount you earned based on your bank statements, even if you do not have the official 1099-INT form yet. The IRS will receive the form eventually, and if the amounts match, there is no problem.
If the 1099-INT shows an amount that does not match your records, contact the bank to investigate. Common errors include interest posted to the wrong account, interest from a joint account attributed to only one owner, or interest from a CD that matured. Get the error corrected before filing your return, or file an amended return if you discover the error after filing.
Frequently Asked Questions
Do I have to pay taxes on money I deposit into a savings account?
No. The money you deposit is not taxable because you already earned it and paid taxes on it when you received it as income. Only the interest the bank pays you on that balance is taxable.
What if my savings account interest is only a few dollars?
You still owe tax on it if you file a return, but you may not be required to file at all if your total income is below the filing threshold for your age and status. If you do file, report all interest, no matter how small.
Can I avoid taxes on savings interest by not reporting it?
No. The bank reports the interest to the IRS on Form 1099-INT, and the IRS will notice if you do not report it on your return. Unreported income can result in penalties and interest charges.
Is savings account interest taxed differently than other income?
It is taxed at your ordinary income tax rate, the same as wages or salary. It is not taxed as a capital gain or at a special rate. The amount of tax you owe depends on your total income for the year.
Do I need to pay estimated taxes on savings interest?
Usually not. Estimated taxes are required when you have income that is not subject to withholding, like self-employment income. Interest income is typically small enough that it does not trigger an estimated tax requirement, but if you have other self-employment or business income, you may need to include interest in your estimated tax calculation.