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

Money you put into a savings account is yours and not taxed. But the interest the bank pays you on that money counts as income to the IRS. You report this interest on your federal tax return each year, and you pay income tax on it at your regular tax rate. The amount of tax depends on how much interest you earned and what tax bracket you fall into.

Your bank sends you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. This form shows exactly how much taxable interest you received. You use this number when you file your taxes. If you earned less than $10, the bank does not have to send the form, but you still owe tax on that interest if you file a return.

State and local taxes also apply to savings interest in most places. Some states do not tax interest income at all, while others tax it the same way the federal government does. A few states offer tax breaks for interest earned on certain types of savings accounts, usually for people over a certain age or with lower incomes.

Key Takeaways

  • The IRS taxes interest your savings account earns as ordinary income at your regular tax rate, but not the principal you deposit.
  • Your bank sends you a Form 1099-INT if you earned $10 or more in interest, which you report on your federal tax return.
  • State and local income taxes also apply to savings interest in most states, though a few states do not tax interest at all.
  • The tax you owe on savings interest depends on your total income and tax bracket, not on the size of your account.
  • High-yield savings accounts earn more interest, which means you owe more tax on the earnings, but the after-tax return is still usually higher than traditional savings accounts.

How the IRS calculates tax on savings interest

The IRS treats savings interest as ordinary income, meaning it gets taxed at the same rate as wages or salary. If you earn $50,000 in salary and $500 in savings interest, the IRS adds that $500 to your $50,000 and taxes your total income of $50,500. This can push you into a higher tax bracket if the interest tips you over a threshold.

Your tax bracket determines what percentage of your interest you pay in federal tax. For 2024, federal tax brackets range from 10% to 37% depending on your income level and filing status. Someone in the 22% bracket pays $0.22 in federal tax on every dollar of interest earned. Someone in the 37% bracket pays $0.37 on every dollar.

You do not pay tax on the interest until you file your return, usually in April of the following year. The bank does not withhold tax from your interest automatically the way employers withhold from paychecks. This means you may need to set aside money from your interest earnings to cover the tax bill when it comes due.

Form 1099-INT and reporting requirements

Banks and credit unions send Form 1099-INT to both you and the IRS by January 31 each year. This form lists all the interest you earned at that institution during the previous calendar year. If you have accounts at multiple banks, you will receive a separate 1099-INT from each one.

You must report all interest income on your federal tax return, even if you do not receive a 1099-INT. If you earned less than $10 at one bank but $8 at another, you owe tax on the full $18 even though neither bank sent a form. The IRS cross-checks the 1099-INT forms it receives from banks against the returns people file, so underreporting interest can trigger an audit notice.

If you earned interest but did not receive a 1099-INT by early February, contact your bank. They may have sent it to an old address, or they may have made an error. Request a corrected form or a statement showing your interest earnings so you can report the correct amount on your return.

State and local taxes on savings interest

Most states tax savings interest the same way the federal government does—as ordinary income. You report your interest on your state tax return and pay tax at your state's rate, which varies widely. Some states have a flat tax rate (the same percentage for everyone), while others use brackets similar to the federal system.

A handful of 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 no state income tax on your savings interest, though you still owe federal tax. A few other states offer partial exemptions—for example, some exempt interest earned by people over 65 or with incomes below a certain threshold.

Local taxes on interest are less common but do exist in some cities and counties. New York City, for example, taxes interest as part of its local income tax. Check your city or county tax rules to see whether you owe local tax on savings interest.

High-yield savings accounts and tax implications

High-yield savings accounts earn significantly more interest than traditional savings accounts—sometimes 4% to 5% annually compared to 0.01% or less at big banks. This higher interest means you owe more tax on your earnings. If you earn $5,000 in interest at a high-yield account instead of $50, your tax bill will be roughly 100 times larger.

However, the after-tax return on a high-yield account is usually still better than a traditional account. Even after paying tax on the higher interest, you end up with more money than you would have earned at a lower rate. For example, earning $5,000 in interest and paying $1,100 in tax (at a 22% rate) leaves you with $3,900 in additional money. Earning $50 in interest and paying $11 in tax leaves you with $39.

The tax on high-yield interest does not change the fact that these accounts are a better deal for your savings. It just means you should factor the tax into your planning. If you expect to earn significant interest, set aside money to cover the tax bill, or plan to pay it from other income when you file your return.

Tax-advantaged alternatives to regular savings accounts

If you want to save money without paying tax on the interest, certain accounts offer tax breaks. Individual Retirement Accounts (IRAs) and 401(k) plans allow your savings to grow without annual tax on the interest. You pay tax only when you withdraw the money in retirement. Roth IRAs and Roth 401(k)s offer an even better deal—you pay tax upfront, but the interest and withdrawals are tax-free forever.

Health Savings Accounts (HSAs) also grow tax-free if you use the money for medical expenses. Treasury bonds and certain municipal bonds offer interest that is exempt from federal tax, state tax, or both. These options are worth exploring if you have significant savings and want to minimize the tax you owe on interest.

The downside of these accounts is that they have contribution limits and withdrawal restrictions. You cannot put unlimited money into an IRA or 401(k), and you cannot withdraw the money before retirement without penalties. Regular savings accounts have no limits and no penalties, which is why most people keep emergency funds in them despite the tax cost.

What to do if you owe tax on savings interest

When you file your tax return, you report your total interest income on Schedule 1 (Form 1040) or directly on your return depending on the tax software you use. Add up all the 1099-INT forms you received and any interest you earned but did not receive a form for. Report this total as your interest income.

The tax software or tax preparer you use will calculate how much tax you owe on this interest based on your total income and tax bracket. If you did not have enough tax withheld from paychecks during the year, you may owe money when you file. If you had too much withheld, you will get a refund.

If you expect to owe a large amount of tax on savings interest in future years, you can adjust your withholding from your job or make estimated tax payments to the IRS. This prevents a big bill at tax time. Talk to a tax preparer or use the IRS withholding calculator on irs.gov to figure out whether you need to make changes.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether your bank sends you a 1099-INT form. You still owe tax on any interest you earned, even if it is $1. Report it on your return using your bank statement or account records.

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

The IRS receives a copy of your 1099-INT from the bank and compares it to your return. If you do not report the interest, the IRS will likely send you a notice asking for the missing income and any tax owed, plus penalties and interest charges. It is better to report it correctly the first time.

Can I deduct savings account fees from my interest income?

No. You report the full interest amount as income. Fees your bank charges are not deductible against interest income. However, if you have significant investment expenses, you may be able to deduct them under other rules—talk to a tax preparer about your specific situation.

Does a joint savings account change how the interest gets taxed?

The interest is taxed to whoever owns the account or whoever the bank reports it to on the 1099-INT. If two people own the account jointly, the bank usually reports half the interest to each person. You each report your share on your own tax return.

Is savings interest taxed differently if I am retired?

No. Savings interest is taxed the same way regardless of your age or employment status. However, if you are over 65, you may may have access to for a higher standard deduction on your federal return, which could reduce the tax you owe on your total income including interest.