The IRS taxes the interest your savings account earns, not the money you deposit

The money you put into a savings account is yours and not taxed again. But the interest the bank pays you on that balance is taxable income. The IRS treats it the same way it treats wages or other money you receive — you owe federal income tax on it, and depending on your state, you may owe state income tax too.

Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. This form reports the interest to both you and the IRS. You then report that amount on your tax return, usually on Schedule 1 (Form 1040) or directly on Form 1040 itself, depending on your filing method.

The tax rate you pay on savings interest depends on your overall income and tax bracket. Interest is taxed as ordinary income, which means it's taxed at the same rate as your salary or other regular income — not at the lower capital gains rates that apply to stocks or bonds held long-term.

Key Takeaways

  • Banks report savings interest of $10 or more on Form 1099-INT, which you receive by January 31 and must report on your tax return.
  • Savings interest is taxed as ordinary income at your regular tax bracket rate, not at preferential capital gains rates.
  • You owe both federal and state income tax on interest, though some states do not tax interest income.
  • High-yield savings accounts earn more interest, which means you owe more tax on that interest — but the after-tax return is still usually higher than traditional savings accounts.
  • If you earn less than $1,100 in interest as a dependent or $1,250 as a single filer in 2024, you may not have to file a federal return, though you should still report the income.

When the bank sends you the 1099-INT form

Your bank or credit union mails Form 1099-INT to you by January 31 of the year after you earned the interest. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. If you earned interest at only one bank and it totaled less than $10, the bank does not have to send you a form, but you still owe tax on that interest.

The form shows the total interest earned in box 1. Some banks also report interest in other boxes if you earned money from certificates of deposit (CDs), money market accounts, or other savings products they offer. Read the entire form to make sure you capture all the interest reported.

Keep your 1099-INT forms for your records. You do not mail them with your tax return, but the IRS receives a copy directly from the bank, so your return must match what the bank reported. If there is an error on the form, contact the bank and ask for a corrected 1099-INT (called an amended 1099-INT).

How to report interest on your tax return

If you file Form 1040 (the main federal income tax form), you report interest income on Schedule 1, Part I, line 8. If you use tax software, it will ask you to enter the amount from your 1099-INT, and the software will place it in the correct location automatically.

You must report all interest you earned, even if you did not receive a 1099-INT. If you earned $9 in interest and the bank did not send a form, you still report that $9. The IRS cross-checks 1099-INT forms against tax returns, so unreported interest is often caught during processing.

If you file jointly with a spouse and you each have separate savings accounts, each person reports their own interest. Do not combine the amounts on one person's return.

State income tax on savings interest

Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. However, some states do not tax interest at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe federal tax on your interest but no state income tax.

A few other states offer partial exemptions. For example, some states exempt interest earned on certain types of savings accounts or only tax interest above a certain threshold. Check your state's tax agency website or your state income tax form instructions to see whether your interest is taxable in your state.

If you moved during the year, you may owe tax to two states. Report your interest to both states on their income tax returns, and claim a credit on one return for taxes paid to the other state to avoid double taxation.

The difference between high-yield and traditional savings accounts from a tax perspective

A high-yield savings account earns significantly more interest than a traditional savings account — sometimes 4% to 5% annually compared to 0.01% or less at a traditional bank. This means you earn more money, but you also owe more tax on that money. However, the after-tax return is still higher with a high-yield account in almost all cases.

For example, if you have $10,000 in a high-yield account earning 4.5% annually, you earn $450 in interest. If you are in the 22% tax bracket, you owe about $99 in federal tax, leaving you with $351 after tax. With a traditional account earning 0.01%, you earn $1 in interest and owe about $0.22 in tax, leaving you with $0.78. The high-yield account still comes out far ahead even after taxes.

The tax you owe on interest is the same whether you keep the money in the account or withdraw it. The interest is taxable income in the year it is earned, regardless of what you do with it.

What happens if you do not report interest income

The IRS receives a copy of every 1099-INT your bank sends to you. If your tax return does not include that interest, the IRS will likely notice the discrepancy during processing. The agency may send you a notice asking you to pay the tax owed plus interest and penalties.

Penalties for underreporting income start at 20% of the unpaid tax. Interest accrues daily on the unpaid amount. If the IRS determines the underreporting was intentional, the penalty can be higher. It is far simpler to report the interest when you file.

If you made an honest mistake and forgot to report interest, you can file an amended return (Form 1040-X) to correct it. Filing an amended return voluntarily before the IRS contacts you can reduce or eliminate penalties in some cases.

Interest earned on joint accounts and accounts for minors

If you have a joint savings account with another person, the interest is split between you based on who owns what percentage of the account. Each person receives their own 1099-INT showing only their share. Report only your share on your tax return.

If you opened a savings account for a minor child and the child owns the money, the interest is the child's taxable income. The child must report it on their own tax return, even if they are a dependent on your return. However, if the child's total income is below the filing threshold for their filing status, they may not have to file a return — though they should still report the interest if they had any tax withheld.

If you (the parent) own the account and the child is simply a beneficiary or authorized user, the interest is your income and you report it on your return.

Frequently Asked Questions

Do I owe tax on interest if I did not withdraw it from the account?

Yes. Interest is taxable in the year it is earned and credited to your account, whether you withdraw it or leave it to compound. The IRS taxes the interest based on when the bank paid it to you, not when you spend it.

What if my interest income is very small, like under $10?

You still owe tax on it, but the bank does not have to send you a 1099-INT. You are responsible for reporting it on your return. If you had multiple accounts and the total interest across all accounts was under $10, report the combined total.

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

No. You report the gross interest the bank paid you, not the net amount after fees. However, if you paid investment-related fees or advisory fees, you may be able to deduct them separately, though the rules are complex and most people cannot deduct them under current tax law.

Do I report interest from a CD the same way as interest from a savings account?

Yes. CDs are reported on the same 1099-INT form as savings account interest. If you cashed in a CD before maturity and paid an early withdrawal penalty, you can deduct that penalty on your tax return (usually on Schedule 1, line 21).

What if I earned interest in a different state than where I live now?

Report the interest to your current state of residence. You do not report it to the state where the bank is located. If you moved mid-year, report all interest earned that year to your new state, and claim a credit for any taxes you paid to your previous state.