You pay taxes on interest your savings account earns, not on the money you deposit
The money you put into a savings account is yours — you do not pay taxes on it. But the interest that the bank pays you for keeping money there is taxable income. If your account earned $10 in interest over a year, you owe tax on that $10. The original balance you deposited stays tax-free.
The bank reports this interest to you and to the IRS on a form called a 1099-INT (Interest Income). You receive it by January 31 each year for the previous year's earnings. You then report that interest on your federal tax return. Whether you actually owe tax on it depends on your total income and filing status — some people earn so little interest that they do not reach the threshold where they have to file a return at all.
State taxes work the same way. If your state has an income tax, interest from a savings account counts as income there too. A few states do not tax interest income at all, but most do.
Key Takeaways
- You do not pay taxes on the money you deposit into a savings account, only on the interest it earns.
- Banks send you a 1099-INT form by January 31 showing all interest earned in the previous year.
- Interest income must be reported on your federal tax return, and on your state return if your state taxes income.
- If you earned less than $1,250 in interest during the year, you may not have to file a federal return, but check your specific situation.
How the IRS knows about your interest income
Every bank and credit union that pays you interest is required to report it to the IRS. They do this using the 1099-INT form, which lists your name, your Social Security number or tax ID, and the total interest paid. The bank keeps a copy for the IRS and sends you a copy.
You should receive your 1099-INT by January 31. If you have accounts at multiple banks, you may receive multiple forms — one from each institution. Add up all the interest from all your forms when you file your return.
The IRS cross-checks the 1099-INT forms they receive from banks against the income you report on your tax return. If you do not report interest that a bank reported, the IRS will notice the mismatch and may send you a notice or bill you for the unpaid tax plus penalties.
When you have to file a return because of savings account interest
The IRS sets a threshold each year below which you do not have to file a federal return. For 2024, if your only income is interest and you are single, you generally do not have to file if you earned less than $14,600. If you are married filing jointly, the threshold is higher. These numbers change yearly.
However, these thresholds assume you have no other income. If you have wages from a job, self-employment income, or other sources, your situation is different. Even if your interest alone is small, you may still need to file because of your other income.
The safest approach: if you received a 1099-INT, file a return. It takes a few minutes to add that income, and filing protects you from IRS notices later.
High-yield savings accounts and interest taxes
High-yield savings accounts pay more interest than traditional savings accounts — sometimes 4% or 5% annually instead of 0.01%. That higher interest is still taxable income, reported the same way on a 1099-INT.
If you have $50,000 in a high-yield account earning 4.5%, you will earn roughly $2,250 in interest over a year. All of that is taxable. The bank reports it, you report it on your return, and you owe tax on it at your ordinary income tax rate.
This is one reason some people move money between account types: a regular savings account earns almost nothing, so the tax burden is tiny. A high-yield account earns more but creates a larger tax bill. Neither is better or worse — it depends on your situation and how much you have saved.
State taxes on savings account interest
Most states that have an income tax treat savings account interest the same way the federal government does: it is taxable income. You report it on your state return along with your federal return.
A handful of states do not tax interest income at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe no state tax on your savings interest, though you still owe federal tax.
Some states tax interest but offer small exemptions or deductions for seniors or low-income filers. Check your state's tax website or ask a tax preparer if you think you might may have access to.
What happens if you do not report interest income
If the IRS receives a 1099-INT from your bank but you do not report that interest on your return, the IRS will eventually notice. They may send you a notice asking you to explain the discrepancy, or they may simply bill you for the unpaid tax plus interest and penalties.
The penalty for not reporting income is usually 20% of the unpaid tax, plus interest that compounds daily. If you owed $100 in tax and did not report it, you might end up owing $120 or more by the time the IRS catches up with you.
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 and penalties will accrue. If you are unsure whether you need to file or report interest, contact a tax preparer or call the IRS at 1-800-829-1040.
Frequently Asked Questions
Do I have to report interest if it is less than $1?
Technically, all interest is taxable income. However, if your interest is very small — under $10 — the IRS is unlikely to pursue it. That said, if you received a 1099-INT, you should report it. The form exists because the bank reported it to the IRS, so reporting it yourself keeps your return consistent with what the IRS already knows.
What if I moved money between banks mid-year?
Each bank reports only the interest it paid you while you held money there. If you had $10,000 at Bank A for six months earning $200 in interest, then moved it to Bank B for six months earning $200 more, you will receive two 1099-INT forms — one from each bank. Add both amounts when you file your return.
Can I deduct savings account fees from the interest I report?
No. You report the gross interest the bank paid you. Fees you paid to the bank are not deductible against that interest. However, if you paid investment fees or tax preparation fees, those may be deductible under other rules — ask a tax preparer about your specific situation.
Do I owe taxes on money I transfer between my own accounts?
No. Transferring money from one of your accounts to another is not income. Only the interest the bank pays you is taxable. Deposits you make, transfers you initiate, and withdrawals you take are all tax-free movements of your own money.
What if my savings account is in a child's name?
Interest earned in a child's account is the child's income and must be reported on the child's tax return, not the parent's. However, if the interest is small enough, the child may not have to file a return. A parent or guardian should consult a tax preparer about the child's specific situation, especially if the account has a large balance.