The IRS taxes savings account interest as ordinary income

Interest your bank pays you on a savings account is taxed by the federal government as ordinary income—the same tax rate as your wages or salary. Your bank reports this interest to the IRS on a Form 1099-INT, and you report it on your tax return. The amount owed depends on your total income for the year and your tax bracket, not on how much interest you earned.

Most savings accounts earn very little interest, so many people owe no federal tax on it. 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—especially in years when interest rates are high. You may also owe state income tax on the interest, depending on where you live.

The bank does not withhold taxes automatically from savings account interest the way it does from paychecks. You are responsible for reporting the interest when you file your tax return, or paying estimated taxes if the amount is large enough.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your regular tax rate, not at a special rate for investment income.
  • Your bank sends you a Form 1099-INT each year showing the interest you earned, and you report this on your tax return.
  • No taxes are withheld from savings account interest automatically, so you must account for it when you file or pay estimated taxes.
  • Most states tax savings account interest as income, though a few states do not tax income at all.
  • Interest earned in a tax-advantaged account like a Roth IRA or 529 plan is not taxed, even though the same interest would be taxed in a regular savings account.

When your bank reports interest to the IRS

Your bank issues a Form 1099-INT for any year in which you earned $10 or more in interest. The bank mails this form to you and files a copy with the IRS by January 31 of the following year. For example, interest you earned during 2024 appears on a 1099-INT you receive in January 2025.

If you have accounts at multiple banks or credit unions, you may receive several 1099-INT forms—one from each institution. You are responsible for adding up all the interest reported across all your forms and reporting the total on your tax return, even if no single bank issued a 1099-INT for you.

The 1099-INT shows the interest earned in the account during that calendar year only. If you opened a savings account on December 1 and earned $50 in interest by year-end, that $50 appears on your 1099-INT for that year. Interest earned after January 1 of the next year appears on the following year's form.

How your tax bracket determines what you owe

Savings account interest is added to your other income—wages, self-employment income, investment gains—and taxed at your marginal tax rate. Your marginal rate is the tax bracket you fall into based on your total income for the year. In 2024, for a single filer, the federal tax brackets range from 10% for income under $11,600 to 37% for income over $578,100. The exact brackets change each year.

This means the tax you owe on $500 in savings interest depends on how much other income you have. If you earn $30,000 in wages and $500 in interest, your total taxable income is $30,500, and the interest is taxed at whatever rate applies to that total. If you earn $150,000 in wages and $500 in interest, the interest is taxed at a higher rate because your total income is higher.

You can use the IRS tax tables or a tax calculator to estimate what you owe. The IRS website offers free tools, and most tax software will calculate this automatically when you enter the 1099-INT information.

State income tax on savings interest

Most states tax savings account interest as income, using the same approach as the federal government. Your state tax rate varies by state and by your income level within that state. A few states—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—do not tax income at all, so residents of those states owe no state tax on savings interest.

New Hampshire and Tennessee tax only dividend and interest income, not wages. If you live in one of those states, your savings interest is taxed, but your wages are not. All other states tax savings interest as part of your regular income.

Some states offer small deductions or exemptions for interest income, particularly for seniors or low-income filers. Check your state's tax authority website to see whether your state has any special rules that might lower your tax bill.

Interest earned in tax-advantaged accounts

Interest earned inside certain accounts is not taxed, even though the same interest would be taxed in a regular savings account. A Roth IRA or Roth 401(k) grows tax-free, and you owe no tax on the interest when you withdraw the money in retirement. A 529 college savings plan also grows tax-free if the money is used for education expenses.

A traditional IRA or traditional 401(k) defers taxes on the interest until you withdraw the money in retirement. At that point, the entire withdrawal—including the interest—is taxed as ordinary income. This is different from a Roth account, where withdrawals in retirement are tax-free.

If you have high-yield savings accounts earning significant interest, moving some money into a Roth IRA or 529 plan can reduce your tax bill. However, these accounts have annual contribution limits and withdrawal rules, so they are not a substitute for a regular savings account. A financial advisor can help you decide whether these accounts make sense for your situation.

What to do if you did not receive a 1099-INT

If you earned less than $10 in interest during the year, your bank is not required to send you a 1099-INT. You still owe tax on that interest, and you should report it on your tax return even though you did not receive a form. Check your account statements to find the exact amount.

If you earned $10 or more and did not receive a 1099-INT by early February, contact your bank. The bank may have the wrong address on file, or there may be a delay in processing. Ask the bank to send you a corrected form or to provide the interest amount so you can report it yourself.

If you received a 1099-INT but believe the amount is wrong, contact your bank immediately. Banks sometimes make errors in calculating or reporting interest. The bank can issue a corrected Form 1099-INT (marked as a correction) and file it with the IRS. You will then report the corrected amount on your tax return.

Reporting interest on your tax return

On your federal tax return, you report savings account interest on Schedule B (if you have more than $1,500 in interest income) or directly on Form 1040 (if you have $1,500 or less). You list each 1099-INT you received and add up the total interest. This total goes into the income section of your return.

If you use tax software, the program will ask you to enter the information from your 1099-INT forms, and it will automatically place the interest in the correct location on your return. If you file by hand or with a tax preparer, they will guide you through the same process.

On your state tax return, you typically report the same interest income in the income section. Some states have a separate line for interest; others lump it together with other income. Your state's tax form or instructions will show you where to report it.

Frequently Asked Questions

Do I have to pay taxes on savings account interest if I earned less than $10?

Yes, you owe tax on all interest you earn, regardless of the amount. Your bank only has to send you a 1099-INT if you earned $10 or more, but you are still responsible for reporting smaller amounts on your tax return. Check your account statements to find the exact interest earned.

Can I deduct savings account interest as a business expense?

No. Savings account interest is taxed as income, not deducted as an expense. The only exception is if you borrowed money to fund the savings account and paid interest on that loan—in that case, you might be able to deduct the interest you paid, but not the interest you earned.

What happens if I do not report savings account interest on my tax return?

The IRS receives a copy of your 1099-INT from your bank. If you do not report the interest, the IRS will likely notice the discrepancy and send you a bill for the unpaid tax plus penalties and interest. It is much simpler to report the interest when you file.

Is interest from a high-yield savings account taxed differently than interest from a regular savings account?

No. Both are taxed as ordinary income at your regular tax rate. The only difference is the amount of interest you earn—a high-yield account pays more interest, so you owe more tax on it. The tax treatment is identical.

Do I need to pay estimated taxes on savings account interest?

Only if your total tax bill for the year is large enough. If you have a job that withholds taxes from your paycheck, the withholding usually covers your savings interest. If you are self-employed or have other income without withholding, you may need to pay estimated taxes quarterly. Use the IRS Form 1040-ES to calculate whether you need to pay.