The IRS taxes savings account interest as ordinary income

Interest you earn on a savings account is taxed by the federal government as ordinary income—the same way the IRS taxes wages or salary. The bank reports what you earned to the IRS on a Form 1099-INT, and you report that same amount on your tax return. You owe federal income tax on every dollar of interest, no matter how small the amount.

Most states also tax savings interest as income, though a handful do not. The rate you pay depends on your total income for the year and your tax bracket, not on the interest rate the bank offers. If you earned $50 in interest and you are in the 22% federal tax bracket, you owe roughly $11 in federal tax on that interest alone.

The bank does not withhold tax automatically from interest deposits the way an employer withholds from a paycheck. You are responsible for setting aside money to pay the tax when you file your return, or making quarterly estimated tax payments if the interest is substantial.

Key Takeaways

  • Savings account interest counts as ordinary income and is taxed at your full marginal tax rate, which ranges from 10% to 37% federally depending on your total income.
  • Banks report interest to the IRS on Form 1099-INT if you earned $10 or more in a calendar year, and you must report the same amount on your tax return.
  • Most states tax savings interest as income, but a few states including Tennessee, Texas, and Wyoming do not tax interest income at all.
  • No tax is withheld from interest payments automatically, so you need to plan ahead to cover the tax bill when you file or make quarterly estimated payments.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw it, but interest in a Roth IRA is never taxed if you follow withdrawal rules.

When the bank sends Form 1099-INT and what it means

If you earned $10 or more in interest during a calendar year, your bank must send you a Form 1099-INT by January 31 of the following year. This form shows the total interest you earned in each account at that bank. You receive one copy and the IRS receives another, so the agency already knows what you earned before you file your return.

The $10 threshold is per bank, not per account. If you have two savings accounts at the same bank and earned $6 in one and $5 in the other, the bank still sends a 1099-INT because the total is $11. If you have accounts at different banks, each bank sends its own form.

You must report the interest shown on the 1099-INT on your tax return, even if you did not receive the form or if the amount is wrong. If the form shows $50 but you only earned $40, you still report what the IRS has on file and then file an amended return if needed. Ignoring a 1099-INT is a red flag for the IRS because the agency cross-checks what banks report against what taxpayers claim.

Federal tax brackets and how much you actually owe

The amount of federal tax you owe on savings interest depends on your tax bracket—the percentage rate applied to your last dollar of income. In 2024, federal tax brackets range from 10% to 37%. If you are single and earned $47,000 in wages plus $500 in interest, that $500 is taxed at your marginal rate, which is 22% for that income level. You owe $110 in federal tax on the interest.

The brackets change every year and vary based on filing status (single, married filing jointly, head of household, and so on). A married couple filing jointly has higher income thresholds before moving into a higher bracket than a single filer does. The IRS publishes updated brackets each January, and tax software automatically applies the correct rates.

Your state tax rate, if your state taxes interest, is separate from federal tax. Some states use a flat rate (like 5% across all income levels), while others use brackets similar to the federal system. A few states—including Tennessee, Texas, Wyoming, and South Dakota—do not tax interest income at all, which means residents owe only federal tax on savings interest.

Tax-advantaged accounts that shield interest from tax

Interest earned inside a traditional IRA or 401(k) is not taxed in the year you earn it. The interest compounds tax-free until you withdraw money from the account, usually in retirement. When you do withdraw, the entire amount (including all the interest) is taxed as ordinary income at that time. This delay can be valuable if you expect to be in a lower tax bracket in retirement than you are now.

A Roth IRA works differently. Interest earned inside a Roth is never taxed, even when you withdraw it, as long as you follow the rules (generally, you must be at least 59½ and have held the account for at least five years). This makes Roth accounts powerful for long-term savers, because decades of compounding interest grows completely tax-free.

A 529 education savings plan also grows interest tax-free as long as you use the money for may have access to education expenses. If you withdraw money for non-education purposes, the interest portion is taxed and you pay a 10% penalty on top.

Regular savings accounts, money market accounts, and certificates of deposit (CDs) do not offer this tax protection. Interest in those accounts is taxed every year, regardless of whether you withdraw the money.

What to do if you earned very little interest

If you earned less than $10 in interest during the year, the bank does not send a 1099-INT. You still owe tax on that interest, but you report it yourself on your return without a form from the bank. Many tax software programs ask you to enter interest income manually, and you can also write it on a line for "other income" if you are filing by hand.

If you earned interest at multiple banks and none individually hit $10, you still report the total on your return. Keep your own records—bank statements or year-end summaries—so you have documentation if the IRS asks.

Some people with very low income may not owe federal tax at all, even on interest. The standard deduction (the amount of income you can earn tax-free) varies by age and filing status. If your total income, including interest, is below the standard deduction, you owe no federal tax. However, you may still need to file to claim refundable credits like the Earned Income Tax Credit.

Tracking interest across multiple accounts and institutions

If you have savings accounts at several banks, each one sends its own 1099-INT. Gather all the forms by late January and add up the total interest. That sum goes on your tax return. Some people use a simple spreadsheet to track interest from each account throughout the year so they are not surprised at tax time.

Online banks and credit unions also send 1099-INT forms if you earn $10 or more. A high-yield savings account at an online bank may earn significantly more interest than a traditional bank account, which means a larger tax bill. If you earned $200 in interest at a high-yield account and you are in the 24% tax bracket, you owe $48 in federal tax on that interest alone.

If you move money between banks during the year, interest is taxed based on which bank held the money when the interest was credited. Moving $10,000 from a low-yield account to a high-yield account mid-year means you earn interest at two different rates, and both amounts appear on separate 1099-INT forms.

Planning ahead to avoid a tax surprise

Because no tax is withheld from interest automatically, you need to plan for the tax bill. If you earn substantial interest—say, $1,000 or more—set aside money from other income to cover the tax when you file. A simple approach is to calculate your tax bracket, multiply your expected interest by that rate, and set that amount aside each quarter.

If you are self-employed or have other income without withholding, you may need to make quarterly estimated tax payments to the IRS. These are due April 15, June 15, September 15, and January 15. If your interest income pushes you into a higher tax bracket, estimated payments help you avoid penalties for underpayment.

Some people reduce their tax burden by moving money into tax-advantaged accounts like a Roth IRA or high-yield savings account at a credit union (which may offer lower rates but still provide some tax benefits in certain states). Others simply accept the tax as a cost of earning interest and budget for it at tax time.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether the bank sends you a 1099-INT form. You still owe tax on any interest you earned, and you report it on your return. Keep your bank statements as proof of the amount.

What if the 1099-INT shows the wrong amount?

Contact your bank immediately and ask them to issue a corrected form. If they do not, you can still file your return with the correct amount and attach a note explaining the discrepancy. File an amended return if needed after the IRS processes your original filing.

Can I deduct savings account interest as a loss?

No. Interest income cannot be deducted. You report it as income and pay tax on it. The only way to reduce the tax is to earn the interest in a tax-advantaged account like a Roth IRA or to have offsetting losses from investments, which follow different rules.

Is interest from a joint savings account taxed differently?

The bank reports the total interest on the 1099-INT, but you and the account holder must decide how to split it for tax purposes. Usually, you each report your proportional share on your own return. Discuss this with the other account holder and keep records of the split.

What if I earned interest but the bank never sent a 1099-INT?

Report the interest on your return anyway. The IRS may have a record from the bank even if you did not receive the form. If the IRS later questions it, you have your bank statements to prove the amount. Contact the bank to request a copy of the form if you need it for your records.