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 not taxable — that is your own money. The interest the bank pays you on that balance is taxable income. The IRS treats savings account interest the same way it treats wages or freelance income: you report it, and you owe tax on it at your ordinary income tax rate.

Your bank will send you a Form 1099-INT each January if your account earned $10 or more in interest during the previous year. You report that interest on your federal tax return. Some states also tax savings interest, though a few states exempt it entirely.

The amount of tax you owe depends on your total income and your tax bracket, not on the size of your savings account. A person in the 22% tax bracket who earns $50 in interest owes roughly $11 in federal tax on that interest. Someone in the 12% bracket owes roughly $6 on the same $50.

Key Takeaways

  • Interest earned in a savings account is taxable income; the principal you deposit is not.
  • Banks send Form 1099-INT when interest reaches $10 or more in a calendar year, and you must report this on your federal tax return.
  • You pay tax on savings interest at your ordinary income tax rate, which depends on your total income and filing status.
  • Some states tax savings interest and some do not; check your state's rules if you live in a state with income tax.
  • High-yield savings accounts earn more interest than traditional accounts, which means higher taxable income but also more money in your account.

How the IRS treats savings account interest

The IRS classifies savings account interest as unearned income — money you receive without working for it. This is different from wages or self-employment income, but it is taxed the same way: at your ordinary income tax rate. If you are in the 24% federal tax bracket, you pay 24% tax on your interest income.

You report this interest on Schedule B (Interest and Ordinary Dividends) of Form 1040, the main federal tax return. If you have multiple savings accounts, you add up all the interest from all of them and report the total. The bank does not withhold tax from your interest automatically — you owe it when you file your return.

If your interest income is very small (under $1,500 for most filers), you may be able to report it directly on Form 1040 without using Schedule B. Your tax software will tell you which form to use based on your situation.

When your bank sends Form 1099-INT

Your bank is required to send you Form 1099-INT if you earned $10 or more in interest during the calendar year. The bank sends this form to you and to the IRS by January 31 of the following year. If you earned less than $10, the bank does not send a form, but you still owe tax on that interest if you have any tax liability at all.

The form shows the account number, the amount of interest, and sometimes the account holder's name and address. Check it against your own records — banks make mistakes. If the amount is wrong, contact the bank and ask for a corrected form (Form 1099-INT with "CORRECTED" printed on it).

If you do not receive a Form 1099-INT by early February and you know you earned interest, contact your bank. You will need the correct amount to file your return accurately.

State income tax on savings interest

Most states that have an income tax also tax savings account interest at the same rate as federal income tax. A few states exempt interest income entirely. Illinois, for example, does not tax interest or dividend income. Some other states have partial exemptions for certain types of savers (like seniors or people over a certain age).

If you live in a state with income tax, check your state's tax agency website or ask your tax preparer whether savings interest is taxable in your state. The amount varies: some states tax at a flat rate, others use brackets like the federal system. A few states have very low rates (under 5%) on all income.

If you live in a state with no income tax (Florida, Texas, Wyoming, and others), you owe no state tax on your savings interest, though you still owe federal tax.

High-yield savings accounts and tax liability

A high-yield savings account earns significantly more interest than a traditional savings account — sometimes 4% to 5% annually compared to 0.01% at a regular bank. This means more money in your account over time, but also more taxable income each year.

If you have $10,000 in a high-yield account earning 4.5%, you earn $450 in interest per year. At a 22% federal tax rate, you owe roughly $99 in federal tax on that interest. A traditional savings account earning 0.01% on the same $10,000 generates $1 in interest and roughly $0.22 in tax.

The higher interest still leaves you ahead — you keep more money even after paying tax. But it is important to understand that the higher earnings also mean higher tax liability. If you are in a low-income year or expect to be, you might want to time large deposits to a high-yield account accordingly.

What happens if you do not report savings interest

The IRS receives a copy of every Form 1099-INT your bank sends. If you do not report the interest on your tax return, the IRS will notice the discrepancy. The agency may send you a notice asking why the income on your return does not match the 1099-INT, or it may simply add the unreported interest to your return and bill you for the tax plus penalties and interest.

The penalty for not reporting income is usually 20% of the underpaid tax, plus interest on the unpaid amount. If the IRS determines the omission was intentional fraud rather than a mistake, the penalty can be as high as 75%. It is much simpler and cheaper to report the interest when you file.

If you made a mistake in a prior year, you can file an amended return (Form 1040-X) to correct it. The sooner you do this, the lower the interest charges will be.

Frequently Asked Questions

Do I have to report savings interest if I earned less than $10?

Your bank does not send a Form 1099-INT for interest under $10, but you still owe tax on it if you have any tax liability. Report it on your tax return even if you do not receive a form. The IRS does not know about it unless you tell them, but reporting it is the correct thing to do.

Can I deduct savings account fees from my interest income?

No. You report the gross interest the bank paid you, not the interest minus fees. Savings account fees are not deductible on your personal tax return. You pay tax on the full interest amount.

What if I opened a savings account late in the year and earned only a few dollars in interest?

You still owe tax on it. If the total is under $10, your bank will not send a 1099-INT, but you report the interest on your return anyway. Use your bank statement to find the exact amount.

Does moving money between my own savings accounts count as taxable income?

No. Transferring money from one account to another is not income — it is your own money moving around. Only the interest the bank pays you is taxable.

If I earn interest in a joint savings account, who pays the tax?

The bank reports the interest to both account holders on separate Forms 1099-INT, usually splitting it 50-50 unless you tell the bank otherwise. Each person reports their share on their own tax return. You and the other account holder should coordinate so you do not both report the full amount.