Savings account interest counts as taxable income to the IRS

Any interest your savings account earns is taxable income. The bank does not withhold taxes automatically — you owe them when you file your tax return. The amount you owe depends on how much interest accumulated during the year, your total income, and your tax bracket.

The IRS treats savings interest the same way it treats wages or freelance income. If you earned $50 in interest, that $50 is added to your other income for the year. You report it on your federal return, and depending on your state, you may report it on your state return too.

Most savings accounts earn so little interest that the tax impact is small. But if you have a high-yield savings account, a certificate of deposit (CD), or a large balance, the interest can be substantial enough to matter.

Key Takeaways

  • The IRS requires you to report all savings account interest as income on your tax return, even if the bank does not send you a form.
  • Banks send a 1099-INT form only if you earned $10 or more in interest during the year, but you owe taxes on any amount above zero.
  • You report interest income on Schedule B (Form 1040) if you have more than $1,500 in total interest and dividend income, or on Form 1040 directly if you have less.
  • The tax you owe on interest depends on your tax bracket — the higher your income, the higher the rate applied to the interest.
  • Some savings vehicles like Roth IRAs and 529 education plans let interest grow tax-free, but regular savings accounts do not.

When the bank sends you a 1099-INT form

If your savings account earned $10 or more in interest during a calendar year, the bank must send you a 1099-INT form by January 31 of the following year. This form shows the total interest paid to you.

You receive one copy in the mail and the bank sends a copy to the IRS. When you file your return, you report the amount shown on the 1099-INT. The IRS already has a record of it, so misreporting or omitting it creates a mismatch that can trigger an audit notice.

If you earned less than $10 in interest, the bank does not send a 1099-INT. You still owe taxes on that interest, but you will not receive a form. You can find the interest amount in your account statements or by logging into your online banking portal.

How to report interest on your tax return

Where you report the interest depends on how much total interest and dividend income you received that year. If your combined interest and dividends total $1,500 or less, you report the amount directly on Form 1040, line 2b.

If your combined interest and dividends exceed $1,500, you must file Schedule B (Form 1040, Part I) and attach it to your return. Schedule B asks you to list each account or investment that paid interest, the amount from each, and the total. You then transfer the total to Form 1040.

If you have a 1099-INT, the amount to report is on box 1 of the form. If you did not receive a form but earned interest, use your bank statements to calculate the total interest for the year.

What tax rate applies to your interest income

Savings account interest is taxed as ordinary income, meaning it is taxed at the same rate as your wages or salary. The rate depends on your tax bracket, which is determined by your total income for the year.

If you are in the 22% tax bracket and earned $100 in savings interest, you owe $22 in federal tax on that interest (before any deductions or credits). If you are in the 12% bracket, you owe $12. The higher your income, the higher your bracket and the more tax you pay on the interest.

This is different from long-term capital gains or may have access to dividends, which are taxed at lower rates (0%, 15%, or 20% depending on income). Savings interest does not get this preferential treatment.

Your state may also tax the interest. Most states treat it the same way the federal government does — as ordinary income taxed at your state income tax rate. A few states do not have an income tax, so you would owe nothing to the state.

Interest from CDs and money market accounts

Certificates of deposit (CDs) and money market savings accounts follow the same tax rules as regular savings accounts. Any interest earned is taxable income and must be reported on your return.

For CDs, the bank sends a 1099-INT if interest reached $10. If you cashed in a CD before maturity and paid an early withdrawal penalty, you can deduct that penalty from your interest income on Form 1040, line 2. This reduces your taxable interest slightly.

Money market accounts are treated identically to savings accounts for tax purposes. The interest is ordinary income and reported the same way.

Tax-advantaged accounts where interest is not taxed annually

Some accounts let interest grow without annual tax bills. A Roth IRA allows interest and investment gains to accumulate tax-free as long as you follow withdrawal rules. A 529 education savings plan also grows tax-free if the money is used for may have access to education expenses.

Traditional IRAs defer taxes on interest until you withdraw the money in retirement. At that point, withdrawals are taxed as ordinary income, but the tax is postponed for years or decades.

These accounts have contribution limits and rules about when you can withdraw without penalty. They are not right for every situation, but if you have money you will not need for years, they can reduce your lifetime tax burden on savings interest.

What to do if you did not receive a 1099-INT but earned interest

If you earned interest but the bank did not send a 1099-INT (usually because the amount was under $10), you still report it on your return. Log into your online banking account or request a year-end statement from the bank showing total interest paid.

Add that amount to any other interest or dividends you received that year. If the combined total is $1,500 or less, report it on Form 1040, line 2b. If it exceeds $1,500, file Schedule B and list each source.

The IRS does not have a record of this interest since no 1099-INT was filed, but you are still legally required to report it. Failing to report income you know about — even small amounts — can result in penalties if the IRS discovers the omission during an audit.

Frequently Asked Questions

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

Yes. Taxes are owed on interest in the year it is earned, whether you withdraw it or leave it in the account. The IRS taxes interest when it is credited to your account, not when you spend or move the money.

What if my interest income is very small, like $2?

You still owe taxes on it, though the amount is minimal. If your total income is low enough to fall in the 10% bracket, you owe about $0.20 in federal tax. Report it on your return using your bank statement as proof of the amount.

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

No. You report the full interest amount the bank paid you. Fees are not deductible against interest income on your personal return. Some self-employed people can deduct business-related banking fees, but that is different.

Do I report interest from multiple savings accounts separately?

If your combined interest from all accounts is $1,500 or less, you report the total on one line. If it exceeds $1,500, you file Schedule B and can list each account separately, though many people combine them by bank for simplicity.

What happens if I report interest income but the bank did not send a 1099-INT?

Nothing negative. The IRS will not question it. Reporting income the IRS does not have a record of is always safer than omitting income you do have a record of. It shows you are being thorough and honest.