You pay federal income tax on interest your savings account earns, but not on the money you deposit
The money you put into a savings account is yours — you do not owe tax on it. But the interest the bank pays you is income, and the IRS treats it the same way it treats wages or investment gains. If your account earned $10 in interest last year, that $10 is taxable income. The original $1,000 you deposited is not.
Most savings accounts earn very little interest now, so your tax bill may be small or zero. But if you have a high-yield savings account, a certificate of deposit (CD), or a money market account, the interest can add up quickly — and you need to know what you owe before tax time arrives.
State income tax works the same way: interest is taxable in most states. A few states — including Pennsylvania, Illinois, and Mississippi — do not tax interest income at all, which is one reason some people move money to banks in those states. But if you live in a state that taxes income, you owe state tax on your interest too.
Key Takeaways
- Interest earned in a savings account is taxable income at both federal and state levels, but the money you deposit is not.
- Banks send you a Form 1099-INT each January if you earned $10 or more in interest during the year, and you must report this on your tax return.
- You may owe no federal tax if your total income is below the standard deduction, but you still need to file if you received a 1099-INT.
- High-yield savings accounts and CDs earn more interest than traditional savings accounts, which means a larger tax bill.
- Some states do not tax interest income, but most do, and you owe tax in the state where you live regardless of where the bank is located.
How the IRS knows about your interest income
Your bank tracks every dollar of interest it pays you. By January 31 each year, the bank sends you a Form 1099-INT (Interest Income) if you earned $10 or more in interest during the previous year. The bank also sends a copy to the IRS.
This is how the IRS knows to expect you to report that income. If you receive a 1099-INT and do not report the interest on your tax return, the IRS will notice the mismatch and may send you a letter asking why. You can avoid this by reporting the interest yourself, even if you think you owe no tax.
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 your total income requires you to file a return. Check your bank statement or online account to see exactly how much interest you earned.
When you owe federal tax on savings interest
Whether you actually owe federal tax depends on your total income and your filing status. The IRS sets a standard deduction — an amount of income you can earn without owing tax. For 2024, the standard deduction is $14,600 for a single person and $29,200 for a married couple filing jointly. These amounts change each year.
If your total income (wages, interest, investment gains, and other sources combined) is below the standard deduction, you owe no federal income tax. But you may still need to file a return if you received a 1099-INT, because the IRS wants to see that you reported the interest.
If your income is above the standard deduction, you owe federal tax on the interest at your regular income tax rate. For most people, this means the interest is taxed as ordinary income — the same rate as your salary. You do not get a special lower rate just because it came from a bank.
State income tax on savings interest
Most states tax interest income the same way the federal government does. You report the interest on your state tax return, and it is taxed at your state income tax rate. Some states have a lower rate for interest than for wages, but most treat it the same.
A handful of states do not tax interest income at all. These include Pennsylvania, Illinois, Mississippi, and a few others. If you live in one of these states, you owe no state tax on your savings interest — only federal tax (if your income is high enough).
You owe tax in the state where you live, not where the bank is located. If you live in New York but open a savings account at a bank in Pennsylvania, you still owe New York state tax on the interest. The bank's location does not matter.
How to report savings interest on your tax return
When you file your federal return, you report the interest on Schedule 1 (Form 1040), which is part of the main tax form. You enter the total interest from all your savings accounts, CDs, money market accounts, and other interest-bearing accounts in one line. If you received a 1099-INT, attach it to your return or enter the information from it into your tax software.
Most people use tax software (like TurboTax, H&R Block, or the IRS Free File program) to file their return. The software walks you through entering your 1099-INT information, and it automatically puts the interest in the right place. If you file by hand or with a tax preparer, they will handle this for you.
For your state return, follow the same process. Enter the interest on the line for interest income. Some states have their own version of the 1099-INT, but most accept the federal form.
Strategies to reduce tax on savings interest
If you have a large savings balance and earn significant interest, you have a few options to lower your tax bill. One is to keep money in a regular savings account instead of a high-yield account — you will earn less interest, but you will also owe less tax. This only makes sense if the tax savings are larger than the interest difference, which is rarely the case.
Another option is to keep some money in a Roth IRA or other tax-advantaged account. Interest earned inside a Roth IRA is not taxed, and you do not report it on your tax return. However, Roth IRAs have contribution limits (you can only put in a certain amount each year) and withdrawal rules, so this works only if you do not need the money soon.
A third option is to use a high-yield savings account in a state with no interest tax, if you live in or can move to one of those states. But this only saves you state tax, not federal tax, and the difference is usually small.
What happens if you do not report savings interest
If you receive a 1099-INT and do not report the interest on your tax return, the IRS will eventually notice. The IRS receives a copy of every 1099-INT sent to you, and it compares these to the returns people file. If the interest is missing, the IRS may send you a notice asking you to amend your return and pay the tax you owe, plus interest and possibly a penalty.
The penalty for not reporting income is usually 20% of the unpaid tax, though it can be lower if you have a good reason for the mistake. Interest accrues on the unpaid tax from the original due date, so the longer you wait, the more you owe. It is much easier to report the interest when you file than to deal with the IRS later.
If the interest is small (under $10) and you did not receive a 1099-INT, the risk is lower, but you still owe the tax if your income requires you to file. The safest approach is to report all interest, no matter how small.
Frequently Asked Questions
Do I have to file a tax return if I only earned interest and no wages?
Only if your interest income is above the standard deduction for your filing status. For 2024, that is $14,600 for a single person. If you earned less, you do not have to file. However, if you received a 1099-INT, it is safer to file anyway so the IRS sees that you reported the interest.
What if I earned interest in multiple savings accounts?
Add up the interest from all your accounts and report the total on your tax return. Each bank will send you a separate 1099-INT if you earned $10 or more at that bank, but you combine all of them into one line on your return.
Is interest from a CD taxed differently than interest from a savings account?
No. Both are taxed as ordinary income at your regular tax rate. The only difference is that CDs usually earn more interest, so your tax bill is larger. You report CD interest on the same line as savings account interest.
Can I deduct any expenses related to my savings account?
No. You cannot deduct bank fees, account maintenance charges, or any other costs related to earning the interest. You report the full interest amount as income, with no deductions.
What if I closed my savings account during the year?
You still owe tax on all the interest you earned before you closed it. The bank will include that interest on your 1099-INT. Report it the same way you would for an account you kept open all year.