Interest counts as income, and you owe federal tax on it
The interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or freelance earnings — you have to report it, and you owe federal income tax on the full amount. Your bank will send you a Form 1099-INT each January showing how much interest you earned the previous year, and that number goes on your tax return.
The tax you owe depends on your overall income and tax bracket. If you earned $500 in interest and you're in the 22% tax bracket, you'll owe roughly $110 in federal tax on that interest. If you're in the 12% bracket, it's roughly $60. The exact amount also depends on whether you take the standard deduction or itemize, and whether you have other income that year.
Some states also tax savings account interest as part of your state income tax, though a few states do not. Check your state's tax rules or ask your tax preparer whether your state taxes interest income.
Key Takeaways
- Your bank reports all savings account interest to the IRS on Form 1099-INT, which you receive by January 31 each year.
- You must report this interest as income on your federal tax return, and the tax you owe depends on your tax bracket.
- Interest under $10 may not trigger a Form 1099-INT, but you still owe tax on it if you're required to file a return.
- High-yield savings accounts pay more interest than traditional accounts, which means higher taxable income and a larger tax bill.
- Some states tax savings account interest as part of state income tax, while others do not.
When your bank sends you Form 1099-INT
Your bank will mail or email you a Form 1099-INT by January 31 if you earned $10 or more in interest during the previous calendar year. This form shows the total interest paid to you and your account number. You receive one copy, and the bank sends a copy to the IRS.
If you earned less than $10, the bank may not send you a form, but you still owe tax on that interest if you're required to file a return. You'll need to add it up yourself from your account statements and report it on your tax return.
If you have multiple savings accounts at different banks, you'll receive a separate Form 1099-INT from each one. When you file your return, you add up all the interest from all your forms and report the total.
How to report interest income on your tax return
Interest income goes on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in total interest and dividends for the year. If you have $1,500 or less, you can report it directly on Form 1040 without filing Schedule B.
You'll list each Form 1099-INT separately on Schedule B, showing the bank name and the interest amount. Then you add up all the interest and transfer the total to Form 1040, where it becomes part of your taxable income.
If you use tax software, it will usually walk you through entering the 1099-INT information, and the software will place the numbers in the right spots on your return. If you work with a tax preparer, bring all your 1099-INT forms with you.
High-yield savings accounts and your tax bill
A high-yield savings account pays significantly more interest than a traditional savings account — sometimes 4% to 5% annually, compared to 0.01% at many big banks. This higher interest means more taxable income and a larger federal tax bill.
For example, if you keep $10,000 in a high-yield account earning 4.5%, you'll earn $450 in interest per year. If you're in the 22% tax bracket, that's roughly $99 in federal tax. The same $10,000 in a traditional account earning 0.01% would earn $1 in interest and cost you almost nothing in tax.
The higher after-tax return on a high-yield account is usually still better than a traditional account, but it's worth doing the math. If you're in a high tax bracket, the tax bite is larger, and you may want to compare the after-tax yield across different account types.
State income tax on savings account interest
Most states tax interest income as part of your state income tax return. You'll report the same interest amount you reported to the IRS on your state return, and you'll owe state tax on it at your state's tax rate.
A few states do not tax interest income 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.
If you moved during the year or worked in a state different from where you live, you may owe tax to multiple states. Your tax preparer or software can help you figure out which states you owe tax to and how to report interest on each state return.
What to do if you don't receive a Form 1099-INT
If you earned interest but didn't receive a Form 1099-INT by February 15, contact your bank and ask for a copy. The bank is required to send it, and they can reissue it if it was lost or sent to the wrong address.
If your bank says they didn't send one because you earned less than $10, you still need to report that interest on your tax return if you're required to file. Pull up your account statements and add up the interest yourself.
If you file your return without reporting interest you earned, and the IRS later receives a Form 1099-INT from your bank showing that interest, the IRS will likely send you a notice asking for the tax owed plus penalties and interest. It's easier to report it correctly the first time.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
If you earned less than $10, your bank won't send you a Form 1099-INT. However, you still owe tax on that interest if you're required to file a return. Add it up from your statements and report it on your return.
Can I avoid taxes on savings account interest?
No. All interest is taxable income. You cannot avoid the tax by not reporting it — the IRS receives a copy of the Form 1099-INT from your bank. The only way to reduce your tax bill is to earn less interest, which usually means keeping less money in savings.
What if I earned interest in a joint account?
The bank will report all the interest on one Form 1099-INT, usually in the name of the first account holder. You and the other account holder need to decide how to split the interest for tax purposes and report your share on your individual returns. Keep documentation of how you split it.
Does interest from a money market account get taxed the same way?
Yes. Money market accounts, certificates of deposit (CDs), and other savings products that pay interest all work the same way — the bank sends you a Form 1099-INT, and you report the interest as income on your tax return.
What if I moved and my bank sent the 1099-INT to my old address?
Contact your bank and provide your current address so they can send you a replacement. You can also ask them to email it to you. If you file your return before receiving it, you can use your account statements to calculate the interest and file an amended return once you get the form.