Savings account interest counts as ordinary income on your federal tax return

The interest your bank pays you on a savings account is taxed as ordinary income at your regular federal tax rate. If you earned $500 in interest during the year, the IRS treats that $500 the same way it treats wages or salary — you owe federal income tax on it. Your tax rate depends on your total income and filing status, not on the interest amount itself.

Your bank will send you a Form 1099-INT in January showing how much interest you earned in the previous year. You report that amount on your federal tax return. If you earned less than $10 in interest, your bank may not send a form, but you still owe tax on it if you file a return.

Most states also tax savings account interest as ordinary income, using the same 1099-INT figure. A few states — including Pennsylvania, Illinois, and Mississippi — do not tax interest income at all. If you live in one of those states, you skip the state portion but still owe federal tax.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax rate, which ranges from 10% to 37% depending on your total income and filing status.
  • Your bank sends a Form 1099-INT in January showing the interest you earned; you report this on your federal return even if the amount is small.
  • Most states tax savings interest the same way, but Pennsylvania, Illinois, and Mississippi do not tax interest income at all.
  • High-yield savings accounts earn more interest but are taxed the same way as regular savings accounts.

Federal tax brackets and what your interest rate means for your bill

Your federal tax rate on savings interest depends on your tax bracket, which is determined by your total income for the year. If you are single and earned $11,600 in wages plus $500 in interest, your total taxable income is $12,100. That places you in the 10% bracket for 2024, so you owe roughly $50 in federal tax on the $500 interest (the actual amount depends on other deductions and credits).

If you earned $50,000 in wages plus $500 in interest, you are in the 12% bracket, so the interest portion costs you about $60 in federal tax. The higher your income from all sources, the higher the tax rate applied to your interest. This is why someone with substantial wages pays more tax on the same $500 in interest than someone with little other income.

Tax brackets change each year. For 2024, the federal brackets range from 10% to 37%. The IRS publishes updated brackets in October for the following year, so you can estimate your tax bill before the year ends.

State income tax on savings interest varies widely

Most states tax savings account interest as ordinary income, using the same 1099-INT your bank sends to the IRS. Your state tax rate is usually lower than federal — typically 3% to 9% depending on the state and your income level. You report the interest on your state return using the same figure from the 1099-INT.

Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes interest and dividends only, not wages). If you live in one of these states, you owe no state tax on savings interest, though you still owe federal tax.

Pennsylvania, Illinois, and Mississippi tax wages and most income but specifically exclude interest and dividend income from taxation. If you live in one of these states, you report the interest to the federal IRS but not to your state. Check your state's tax website or contact your state revenue department if you are unsure whether your state taxes interest.

When you must report interest under $10 and when you do not

Banks are required to send a Form 1099-INT only if you earned $10 or more in interest during the calendar year. If you earned $8 in interest, your bank will not send a form. However, you still owe tax on that $8 if you file a federal return — you just have to report it yourself.

If you do not file a return because your income is below the filing threshold, you do not owe tax on the interest. For 2024, the filing threshold for a single person under 65 is $13,850 in total income. If your only income is $8 in interest, you are below the threshold and do not have to file. But if you have wages or other income that pushes you over the threshold, you must report the interest even if no 1099-INT was issued.

Keep your own records of interest earned, especially if you have multiple savings accounts at different banks. Add up the interest from all accounts when you file your return, even if some accounts earned less than $10 individually.

High-yield savings accounts are taxed the same way as regular accounts

A high-yield savings account earns more interest than a traditional savings account — sometimes 4% to 5% annually compared to 0.01% at a brick-and-mortar bank. But the tax treatment is identical. The higher interest is still reported on a 1099-INT and taxed as ordinary income at your federal and state rates.

If you earn $2,000 in interest from a high-yield account instead of $50 from a regular account, you owe tax on the full $2,000. At the 12% federal bracket, that is $240 in federal tax instead of $6. The higher earnings are worth it for many people, but factor in the tax bill when comparing accounts.

Some people move money to high-yield accounts in December to earn interest in the new tax year, thinking it will lower their current-year tax bill. It does not — the interest accrues when you earn it, not when you withdraw it. Interest earned in December is taxed in the year you earned it, regardless of when you move the money.

How to report savings interest on your tax return

When you file your federal return, you report interest income on Schedule 1 (Form 1040), line 8. If you received a 1099-INT, copy the amount from box 1 of the form. If you did not receive a 1099-INT but earned interest under $10, write in the amount you calculated.

If you have interest from multiple sources — savings accounts, CDs, money market accounts, bonds — add them all together and report the total on line 8. You do not list each account separately; one total figure is all that is needed.

For your state return, follow your state's instructions. Most states have a line for interest income on their main return form. Use the same total you reported to the IRS. If your state does not tax interest, you skip this step entirely.

Frequently Asked Questions

Do I owe tax on interest if I have less than $1,000 in savings?

Yes, if you earned any interest during the year. The amount in your account does not matter — only the interest you earned. A $500 account earning 4% annually generates $20 in interest, which is taxable income. You report it on your return even though the amount is small.

What if I earned interest in two different states during the same year?

Report the total interest on your federal return. For state taxes, report it to the state where you lived when you earned it, or follow that state's rules for non-residents. If you moved mid-year, you may owe tax to both states — check each state's website for guidance on part-year residents.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount on your 1099-INT and your tax return. Fees are not deductible against interest income. However, if you paid significant investment-related fees, you may be able to deduct them as miscellaneous itemized deductions, though this is rare and subject to limits.

Is interest from a joint savings account split between two people for tax purposes?

Not automatically. The bank reports the full interest on a 1099-INT to whoever the account is registered under. If the account is truly joint and both people contributed equally, you can ask the bank to split the 1099-INT between you, or you can report the split on your own return. Keep records showing who contributed what if you split it.

Do I owe tax on interest if I am a dependent on someone else's return?

Yes. Being a dependent does not exempt you from tax on interest income. You file your own return if your interest plus other income exceeds the filing threshold for dependents (which is higher than for independent filers). Your parents cannot claim the interest as their income.