You pay taxes on interest your savings account earns, not on the money itself
The cash sitting in your savings account is not taxed. The interest that account generates is. If you have $10,000 in savings and earn $50 in interest over a year, you owe tax on that $50—not on the $10,000. The bank reports this interest to the IRS on a 1099-INT form, and you report it on your tax return.
The amount of interest you earn depends on the account's interest rate and how much money you keep in it. High-yield savings accounts currently pay between 4% and 5% annually, while traditional savings accounts at large banks often pay less than 0.5%. The higher the rate, the more interest you earn, and the more you owe in taxes on that interest.
You do not owe tax on money you deposit into savings, money you transfer between your own accounts, or money someone gives you. Tax applies only to the interest the bank pays you for letting them use your money.
Key Takeaways
- Interest earned on savings accounts is taxable income; the principal balance itself is not.
- Banks report interest of $10 or more on a 1099-INT form sent to both you and the IRS.
- Interest is taxed at your ordinary income tax rate, which depends on your total income and filing status.
- You must report all interest income on your tax return, even if you do not receive a 1099-INT.
How banks report your interest to the IRS
Your bank sends you a 1099-INT form by January 31 each year if you earned $10 or more in interest during the previous year. The form shows the total interest paid to you. The bank also sends a copy to the IRS, so the agency knows how much interest you received.
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. Keep your own records of interest earned in case you need them later.
If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add up all the interest from all forms and report the total on your tax return.
What tax rate applies to your interest income
Interest is taxed as ordinary income, meaning it is taxed at the same rate as wages, salary, or self-employment income. Your tax rate depends on your total income for the year and your filing status (single, married filing jointly, head of household, and so on).
If you earned $50,000 in wages and $200 in interest, your total taxable income is $50,200. That extra $200 is taxed at your marginal rate—the rate that applies to your highest income. For most people, this is between 10% and 24%, though it can be higher or lower depending on your situation.
Interest income does not get a special tax break the way some investment income does. may have access to dividends and long-term capital gains can be taxed at lower rates, but savings account interest is always taxed as ordinary income.
When you do not owe tax on savings account money
You do not owe tax on deposits you make into savings. If you put $5,000 of your paycheck into savings, that $5,000 was already taxed when you earned it as wages. Putting it in savings does not create a new tax bill.
You also do not owe tax on money people give you—gifts from family, money from an inheritance, or refunds you receive. These are not income in the tax sense. The only exception is if someone pays you money in exchange for work or services; that is income and must be reported.
Transfers between your own accounts do not create taxable income either. Moving money from checking to savings, or from one savings account to another, has no tax consequence.
How to report interest on your tax return
You report interest income on Schedule B (Interest and Ordinary Dividends) if you use the long form (Form 1040). If your interest is less than $1,500 and you have no other investment income, you can report it directly on the main 1040 form instead.
If you use tax software, it usually walks you through entering your 1099-INT information. If you file by hand or with a tax preparer, bring all your 1099-INT forms with you. The preparer will add up the interest and put it on the correct line of your return.
You must report all interest you earned, even if you did not receive a 1099-INT or if the amount was small. The IRS has a copy of your 1099-INT from your bank, so reporting it yourself prevents mismatches that can trigger an audit notice.
Interest rates and how much tax you will owe
The amount of interest you earn depends on the account's rate and your balance. A high-yield savings account paying 4.5% on $10,000 generates about $450 in annual interest. At a 22% tax rate, you would owe roughly $99 in tax on that interest. A traditional savings account paying 0.05% on the same $10,000 generates only $5 in interest, which is below the 1099-INT reporting threshold.
Interest rates change frequently and vary by bank. Before opening a savings account, check the current rate and do the math on how much interest you would earn. That helps you understand how much taxable income the account will generate.
Some people move money to high-yield accounts specifically because the higher interest rate is worth the extra tax. Others prefer lower-rate accounts to minimize taxable income. There is no right answer—it depends on your situation and how much you value the higher returns.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. The $10 threshold only determines whether the bank must send you a 1099-INT form. You still owe tax on all interest you earned, even if it is $1 or $5. Keep your own records and report it on your return.
What if I earned interest but did not get a 1099-INT?
Report the interest anyway. The bank may have made a mistake, or the amount may have been below the reporting threshold. The IRS expects you to report all income regardless of whether you received a form. If the bank later sends a corrected form, you can amend your return.
Is interest from a savings account taxed differently than interest from a CD?
No. Interest from certificates of deposit, money market accounts, and regular savings accounts are all taxed the same way—as ordinary income. The bank reports it on a 1099-INT, and you report it on your tax return at your ordinary income tax rate.
Can I deduct savings account interest as a loss?
No. Interest income cannot be deducted or offset against other income. You report the full amount and pay tax on it. The only way to reduce the tax is to earn less interest, which means either keeping less money in savings or moving to an account with a lower rate.
Do I owe tax on interest if I am not required to file a tax return?
Technically yes, but if your total income is below the filing threshold for your situation, you do not have to file. However, if you had taxes withheld from wages or are due a refund, filing anyway may be worth it to get your money back.