The IRS taxes interest you earn, not the balance itself
The money sitting in your savings account is not taxable just because it exists there. What the IRS taxes is the interest your bank pays you on that balance. If you have $50,000 in savings and earn $200 in interest over the year, you owe tax on the $200, not on the $50,000.
Your bank will send you a Form 1099-INT at the end of the tax year if you earned $10 or more in interest during that year. You report this interest as income on your federal tax return. The amount of tax you owe depends on your overall income and tax bracket, not on how much principal you have saved.
The only exception is if your savings account is held in a tax-advantaged account like a Roth IRA or a 529 college savings plan. Those accounts have special rules that let the interest grow without triggering a tax bill each year. A regular savings account at a bank or credit union does not have this protection.
Key Takeaways
- The IRS taxes interest earned on savings, not the principal balance, so a $100,000 account with $50 in annual interest means you report $50 as taxable income.
- Your bank reports interest of $10 or more on Form 1099-INT, which you receive by January 31 and must report on your tax return.
- Interest is taxed as ordinary income at your regular tax rate, which varies based on your total income and filing status.
- High-yield savings accounts earn more interest than traditional savings accounts, so they generate larger tax bills even though the principal is the same.
- Tax-advantaged accounts like Roth IRAs and 529 plans do not trigger annual tax bills on interest, but regular savings accounts do.
How banks report your interest to the IRS
Your bank tracks every penny of interest it pays you throughout the year. By January 31, the bank sends you a Form 1099-INT showing the total interest earned in the prior calendar year. The IRS receives a copy of this form at the same time.
If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. You must add up all the interest from all your accounts and report the total on your tax return. The IRS cross-checks your return against the 1099-INT forms it received, so underreporting interest is caught quickly.
If your interest was less than $10 for the year, your bank may not send you a 1099-INT, but you still owe tax on that interest if you have other income. You can find the exact amount on your monthly statements or by logging into your online banking portal and adding up the interest deposits.
Interest rates and how much tax you will owe
The higher your savings account's interest rate, the more interest you earn and the more you owe in taxes. A high-yield savings account earning 4% or 5% annually will generate far more taxable interest than a traditional savings account earning 0.01%. For example, $10,000 in a high-yield account at 4.5% earns $450 per year in taxable interest, while the same $10,000 in a traditional account at 0.01% earns only $1.
The tax you owe on that interest depends on your tax bracket. If you are in the 22% federal tax bracket, $450 in interest costs you about $99 in federal income tax. If you are in the 12% bracket, the same $450 costs about $54. State income tax, where applicable, adds to this amount.
Some states do not tax interest income at all. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. If you live in one of these states, you only owe federal tax on your savings interest. Other states tax interest at rates ranging from about 1% to over 13%, depending on your income and the state.
When savings interest does not trigger a tax bill
Money in a Roth IRA grows without annual tax bills. You contribute after-tax dollars, but the interest and growth are never taxed, and you can withdraw the money tax-free in retirement. The catch is that you can only contribute $7,000 per year (or $8,000 if you are 50 or older), and you cannot touch the money before age 59½ without penalties in most cases.
A 529 college savings plan works similarly for education expenses. Interest earned in a 529 account is not taxed as long as you use the money to pay for tuition, room and board, or other may have access to education costs. If you withdraw the money for non-education purposes, you owe tax on the earnings plus a 10% penalty.
A Health Savings Account (HSA) also grows tax-free if you use it for medical expenses. You can contribute up to $4,150 per year (for individual coverage) or $8,300 (for family coverage) in 2024, and the interest is never taxed as long as you spend the money on may have access to medical costs.
Regular savings accounts, money market accounts, and certificates of deposit (CDs) at banks do not have this tax protection. All interest from these accounts is taxable in the year you earn it.
Reporting savings interest on your tax return
You report interest income on Schedule B (Interest and Ordinary Dividends) if your total interest and dividends exceed $1,500 for the year. If your interest is $1,500 or less, you can report it directly on your Form 1040 without filing Schedule B, though you still need to have the 1099-INT forms for your records.
The interest goes into the "ordinary income" section of your return, which means it is taxed at your regular income tax rate. It does not get any special treatment like long-term capital gains do. If you earned $60,000 in wages and $500 in savings interest, your taxable income is $60,500.
If you did not receive a 1099-INT but you know you earned interest (because you saw deposits in your account), you still report that interest on your return. Keep your bank statements as proof in case the IRS asks questions later.
What to do if you earned interest but did not get a 1099-INT
If your interest was under $10, your bank is not required to send you a 1099-INT, but you still owe tax on it. Check your monthly statements or your year-end account summary to find the exact amount. Add it to your tax return even though you do not have an official form.
If your interest was $10 or more and you did not receive a 1099-INT by February 15, contact your bank directly. Ask them to send you a corrected form or a statement showing your interest. Keep a record of this request in case you need to prove you tried to get the form.
If you moved during the tax year and your bank sent the 1099-INT to an old address, you can still find the information online. Log into your bank account and look for a tax documents section, or call the bank and ask them to email or mail you a copy. The deadline to report interest on your tax return is the same whether you have the physical form or not.
Frequently Asked Questions
Do I have to report interest if I only earned a few dollars?
Yes. Any interest you earn is taxable income, even if it is $1. Your bank only sends you a 1099-INT if you earned $10 or more, but you still owe tax on smaller amounts. Report it on your return based on your bank statements.
Is interest from a joint savings account taxable to both people?
The person whose Social Security number is listed as the account owner receives the 1099-INT. However, if you own the account jointly and both contributed to it, you may need to split the interest income for tax purposes. Check with a tax professional about your specific situation, as the rules depend on how the account was funded.
What if I closed my savings account during the year?
You still owe tax on all the interest you earned before closing it. Your bank will send you a 1099-INT showing the interest through the date you closed the account. Report this interest on your tax return for the year you closed the account.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. Savings account fees are not deductible. However, if your bank charged you fees that exceeded your interest, you still only report the interest as income, not a negative number.
Do I owe taxes on interest if I am retired and do not work?
Yes. Interest is taxable income regardless of whether you work. However, if your only income is interest and it is below a certain threshold (around $14,600 for single filers in 2024), you may not owe federal income tax. Check the IRS website for the current standard deduction for your filing status.