The IRS does not tax the money sitting in your savings account itself, but it does tax the interest your bank pays you

Your savings account balance is not taxable income. The dollars you deposit and hold there are money you have already earned and paid tax on (or will pay tax on when you withdraw it to spend). The IRS leaves that alone.

What the IRS does tax is the interest your bank pays you for keeping money there. If your savings account earned $50 in interest over a year, that $50 is taxable income you must report. Your bank will send you a Form 1099-INT at the end of the year showing how much interest you earned, and you report that amount on your tax return.

The interest rate varies by bank and account type. Some savings accounts earn almost nothing; high-yield savings accounts currently earn between 4 and 5 percent annually, though that rate changes. Even at higher rates, the actual dollar amount of interest on a modest balance is usually small enough that many people owe little or no additional tax on it.

Key Takeaways

  • The money you deposit into a savings account is not taxable — you have already paid tax on it or will when you earn it.
  • Interest paid by your bank on your savings account balance is taxable income that you must report to the IRS.
  • Your bank sends you a Form 1099-INT each January showing the interest you earned the previous year.
  • You report the interest amount on your tax return, and the tax owed depends on your overall income and tax bracket.

When you receive a Form 1099-INT and what it means

If your savings account earned $10 or more in interest during the year, your bank is required to send you a Form 1099-INT by January 31. This form shows the total interest paid to you. You receive a copy and the bank sends a copy to the IRS.

You must include the interest amount shown on the 1099-INT when you file your tax return. If you earned interest from multiple banks or accounts, you will receive multiple 1099-INT forms — one from each institution. Add all the interest together and report the total.

If your bank paid you less than $10 in interest, they may not send a 1099-INT, but you still owe tax on that interest if you are required to file a return. Keep your own records of any interest earned.

How interest income affects your tax bill

The amount of tax you owe on savings account interest depends on your total income and your tax bracket. Interest is treated as ordinary income, meaning it is taxed at the same rate as wages or salary.

If you are in the 22 percent tax bracket, $100 in interest costs you roughly $22 in federal tax. If you are in the 12 percent bracket, it costs roughly $12. State income tax may apply on top of that, depending on where you live.

For many people with modest savings, the interest earned is small enough that it does not push them into a higher tax bracket or significantly increase their tax bill. But if you have a large balance in a high-yield account, the interest can add up quickly and should be factored into your tax planning.

Strategies to reduce taxable interest income

If you want to earn interest while minimizing tax, you have a few options. A Roth IRA lets you earn interest and investment gains tax-free, though you can only contribute a limited amount each year and cannot withdraw the earnings until retirement. A traditional IRA offers a tax deduction on contributions, though you pay tax on withdrawals later.

A 529 education savings plan lets you save for college or K-12 education with tax-free growth, as long as you use the money for may have access to education expenses. Some states also offer tax deductions for 529 contributions.

If you do not have access to these accounts or have already maxed them out, keeping money in a regular savings account is still reasonable — the tax on modest interest is usually small. The benefit of having the money available and safe often outweighs the tax cost.

Reporting interest on your tax return

When you file your federal tax return, you report interest income on Schedule B (if you have other investment income) or directly on your Form 1040, depending on the total amount. The instructions that come with your tax forms will tell you where to enter it.

If you use tax software, it will typically ask you to enter the interest amount from your 1099-INT forms, and the software will place it in the correct location on your return automatically.

If you file your taxes by hand or with a tax preparer, bring all your 1099-INT forms with you. Do not guess at the amount — use the exact figure from the form.

What happens if you do not report interest income

The IRS receives a copy of every 1099-INT your bank sends you. If you do not report the interest on your tax return, the IRS will notice the discrepancy when it matches your return against the forms it received from banks.

Unreported interest can trigger an audit, a notice asking you to explain the difference, or an automatic adjustment to your return with a bill for the tax owed plus penalties and interest. It is simpler and cheaper to report it correctly the first time.

Frequently Asked Questions

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

Your bank does not have to send a 1099-INT for interest under $10, but you still owe tax on it if you are required to file a return. Keep your own records and report the amount on your return.

What if I have savings accounts at multiple banks?

You will receive a separate 1099-INT from each bank showing the interest it paid. Add all the amounts together and report the total on your tax return.

Can I deduct the taxes I pay on savings interest?

No. Interest income is taxable, and you cannot deduct the tax you owe on it. You can only deduct certain investment expenses in limited circumstances, which do not apply to regular savings account interest.

Does a joint savings account change how interest is taxed?

If you own a joint account, the interest is split between the owners based on each person's ownership share. Your bank will issue 1099-INT forms showing each owner's portion, and each person reports their share on their own tax return.

Is interest from a money market account taxed the same way?

Yes. Money market accounts, certificates of deposit (CDs), and other savings vehicles all generate interest that is taxed as ordinary income. Your bank will send a 1099-INT for any interest earned, and you report it the same way.