You pay income tax on savings account interest at your ordinary tax rate

The interest your bank pays you on a savings account is taxed as ordinary income, the same way wages are taxed. If you earn $100 in interest, the IRS treats it like $100 in income. You report it on your tax return, and you owe federal income tax on it at whatever tax bracket you fall into — which could be 10%, 12%, 22%, or higher, depending on your total income for the year.

Most banks send you a Form 1099-INT in January if you earned $10 or more in interest during the previous year. That form tells you exactly how much interest you earned, and it also goes to the IRS. You use that number when you file your taxes. If you earned less than $10, the bank may not send a form, but you still owe tax on the interest — you have to track it yourself.

State and local income taxes also apply to savings interest in most states. A few states — including Florida, Texas, and Wyoming — do not have state income tax, so residents there pay only federal tax on interest. If you live in a state with income tax, you will owe that tax on top of 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.
  • Your bank sends you a Form 1099-INT if you earned $10 or more in interest, and you must report that amount on your federal tax return.
  • Most states tax savings interest as income, so you will owe both federal and state tax unless you live in a state with no income tax.
  • The tax is due when you file your return, usually by April 15, even if the bank did not withhold money from your account.

How the tax rate is determined

Your tax rate on interest depends on your total income for the year, not just the interest itself. The IRS uses tax brackets — ranges of income that are taxed at different rates. In 2024, if you are single and earn between $11,600 and $47,150 in total income, you fall into the 12% bracket. If you earn between $47,150 and $100,525, you are in the 22% bracket. The more you earn overall, the higher the rate on your interest.

This matters because a high-yield savings account that pays 4% or 5% interest sounds good until you realize you are paying 22% or 24% in taxes on that interest. If you earn $1,000 in interest and you are in the 24% bracket, you owe $240 in federal tax on it. State tax would be additional.

The tax brackets change every year, and they are different if you are married filing jointly, head of household, or single. You can find the current brackets on the IRS website or ask a tax professional what bracket you fall into based on your income.

When you owe the tax and how to pay it

You do not pay tax on savings interest as you earn it — the bank does not withhold money from your account. Instead, you owe the tax when you file your income tax return, usually by April 15 of the following year. If you expect to owe more than $1,000 in taxes for the year, the IRS may require you to make estimated tax payments four times a year, but most people with only savings interest do not need to do this.

When you file your return, you report the interest on Schedule B (if you have other investment income) or directly on your Form 1040 (if interest is your only investment income). The interest gets added to your other income, and your total tax is calculated from there. If you have already paid taxes through an employer withholding, you may get a refund. If you have not paid enough, you will owe money.

If you miss reporting interest income, the IRS will catch it because the bank reported it on the Form 1099-INT that went to them. Penalties and interest charges apply if you owe tax you did not pay.

Strategies to reduce tax on savings interest

You cannot avoid the tax, but you can reduce the amount of interest you earn and therefore the tax you owe. One option is to keep money in a regular savings account that pays little or no interest — but this defeats the purpose of saving. A more practical approach is to use a tax-advantaged account if you are saving for a specific goal.

A Roth IRA lets you save up to $7,000 per year (or $8,000 if you are 50 or older) and earn interest tax-free. You pay tax on the money going in, but all the interest and growth is never taxed. A Health Savings Account (HSA) works similarly for medical expenses — interest grows tax-free if you use the money for may have access to health costs. A 529 college savings plan lets interest grow tax-free if used for education expenses.

If you do not have access to these accounts or have already maxed them out, you are stuck paying tax on regular savings interest at your ordinary rate. Some people keep emergency funds in a regular savings account and put longer-term money in tax-advantaged accounts to balance liquidity with tax efficiency.

What happens if you earn very little interest

If your savings account earns less than $10 in interest during the year, your bank does not have to send you a Form 1099-INT. However, you still owe tax on that interest — you just have to track it yourself. This is rare with modern savings accounts, but it can happen if you keep money in a very low-yield account or if you only had the account for part of the year.

If you earned $5 in interest and you are in the 22% tax bracket, you technically owe $1.10 in federal tax on it. In practice, many people do not report interest under $10, and the IRS is unlikely to pursue it. But technically, it is taxable income that should be reported.

How to report interest on your tax return

When you receive your Form 1099-INT in January, check it for accuracy. The form shows your name, Social Security number, and the interest amount. If the amount is wrong, contact your bank and ask for a corrected form. Do not file your tax return with an incorrect 1099-INT.

When you file your return, you enter the interest amount from the 1099-INT on your tax form. If you use tax software like TurboTax or TaxAct, you can enter the information directly, and the software calculates your tax. If you file by hand or with a tax professional, give them the 1099-INT and they will handle it. The interest gets added to your other income, and your total tax liability is calculated from there.

Keep a copy of your 1099-INT with your tax records for at least three years in case the IRS asks questions about your return.

Frequently Asked Questions

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

Technically yes — all interest income is taxable. Your bank does not send a Form 1099-INT for amounts under $10, but you should still report it on your return. In practice, the IRS is unlikely to pursue very small amounts, but you are required to report it.

What if I have multiple savings accounts at different banks?

Each bank sends a separate Form 1099-INT for the interest earned at that bank. You add up all the interest from all your accounts and report the total on your tax return. The IRS receives copies of all the 1099-INTs, so they know your total interest income.

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

No. You report the full interest amount on your 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, but this is rare and has strict limits.

Does a high-yield savings account change how much tax I owe?

No — the tax rate is the same whether your interest comes from a regular savings account or a high-yield account. The difference is that a high-yield account earns more interest, so you owe tax on a larger amount. A 5% interest rate means more tax than a 0.01% rate, but the tax rate itself does not change.

What if the bank sends me a 1099-INT but I did not receive the interest?

Contact your bank immediately. If interest was credited to your account and then removed due to a fee or error, the bank may issue a corrected 1099-INT. If the form is wrong, the bank will send you a corrected version, and you file that with your taxes instead of the original.