Yes, the interest your savings account earns is taxed as ordinary income

The money you deposit into a savings account is not taxed — that is your own money. But the interest the bank pays you on that balance is taxed by the federal government and, in most states, by your state government too. You report this interest on your tax return each year, and it counts as ordinary income at whatever tax rate applies to your income bracket.

The amount of tax you owe depends on how much interest you earned and your total income for the year. A savings account earning $50 in interest will create a smaller tax bill than one earning $5,000, but both are taxable. The bank will send you a form called a 1099-INT (Interest Income) by January 31 each year if you earned $10 or more in interest during that year.

High-yield savings accounts earn more interest than traditional savings accounts, which means they generate a larger tax bill. This is one reason people sometimes choose them despite the tax cost — the interest rate is high enough that even after taxes, you come out ahead compared to a regular account.

Key Takeaways

  • Interest earned on a savings account is taxed as ordinary income at your federal tax rate and your state tax rate (if your state has income tax).
  • The bank sends you a 1099-INT form by January 31 if you earned $10 or more in interest during the year, and you report this on your tax return.
  • The principal amount you deposit is never taxed — only the interest the bank pays you is subject to tax.
  • High-yield savings accounts generate larger tax bills because they pay more interest, but the after-tax return is often still higher than a traditional account.
  • If you earned less than $10 in interest, the bank may not send a 1099-INT, but you still owe tax on that interest if you file a return.

How the IRS knows about your savings account interest

Banks report interest payments to the IRS automatically. When your account earns interest, the bank records it and sends a copy of your 1099-INT to both you and the IRS. This means the IRS already knows how much interest you earned before you file your tax return — they are not relying on you to report it honestly.

If you receive a 1099-INT and do not report that interest on your tax return, the IRS will notice the discrepancy. This can trigger an audit or a notice asking you to explain the missing income. Even small amounts of unreported interest can cause problems, so it is important to include the 1099-INT information on your return.

You will receive the 1099-INT in the mail or electronically, depending on how your bank communicates with you. Check your mail and email in late January. If you do not receive one by February 15, contact your bank — they may have the wrong address on file.

What tax rate applies to your savings interest

Savings account interest is taxed at your ordinary income tax rate, which is the same rate that applies to your wages, salary, or self-employment income. This is different from capital gains tax, which is lower. If you are in the 22% federal tax bracket, your savings interest is taxed at 22%, not at the lower capital gains rate.

Your tax bracket depends on your total income for the year. A person earning $30,000 in wages plus $500 in savings interest will be taxed on that $500 at whatever rate applies to their $30,500 total income. If you earn a lot of interest, it can push you into a higher tax bracket, which means you pay a higher rate not just on the interest but on some of your other income too.

State income tax also applies to savings interest in most states. The state tax rate varies — some states tax interest at the same rate as wages, others have a flat rate, and a few states (like Florida, Texas, and Wyoming) do not have state income tax at all. Check your state's tax rules or ask your accountant what rate applies to you.

The 1099-INT form and what it means

The 1099-INT is a tax form the bank sends you showing how much interest you earned. It has boxes for different types of interest income — most savings accounts will show interest in Box 1, labeled "Interest Income." The form also shows your account number and the bank's name and tax ID number.

You receive two copies: one to keep for your records and one to attach to your tax return (or to have available if the IRS asks). The bank also sends a copy directly to the IRS, so your return needs to match the 1099-INT or you will create a mismatch that triggers IRS attention.

If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each bank. You add up all the interest from all the forms and report the total on your tax return. Some tax software will let you enter each 1099-INT separately, or you can add them together and enter one total.

When you earn less than $10 in interest

Banks are not required to send you a 1099-INT if you earned less than $10 in interest during the year. However, you still owe tax on that interest. If you file a tax return, you should report it even if you did not receive a form.

This is a common situation with traditional savings accounts that pay very low interest rates. You might earn $3 or $4 in a year, which is not enough to trigger a 1099-INT, but it is still taxable income. Keep your own records of interest earned — your bank statement will show it — so you can report it accurately.

If you do not file a tax return because your income is below the filing threshold, you do not need to report the interest. But if you file a return for any reason, include all interest income, even amounts under $10.

State taxes on savings account interest

Most states tax savings account interest the same way the federal government does — as ordinary income at your state tax rate. However, the rules vary by state.

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

Some states offer tax breaks for certain types of savings. For example, a few states exempt interest earned in accounts set up for education or retirement. Check your state's tax website or ask a tax preparer whether any breaks apply to your situation.

How to report savings interest on your tax return

On the federal return, you report interest income on Schedule 1 (Form 1040), which feeds into your main 1040 form. If you use tax software, it will ask you for your 1099-INT information and fill in the right lines automatically. If you prepare your return by hand, you enter the total interest in the "Interest" section of Schedule 1.

If you have a spouse filing jointly, you report interest from both spouses' accounts on one return. If you have a dependent child with a savings account, their interest is reported on their own tax return (or on your return if they are claimed as a dependent and their income is below the threshold for filing).

Keep your 1099-INT forms and bank statements for at least three years in case the IRS asks questions. The IRS can audit a return for up to three years after you file, and having your documents ready makes the process faster.

Frequently Asked Questions

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

The bank does not have to send you a 1099-INT if you earned less than $10, but you still owe tax on it if you file a return. Report all interest income on your tax return, even small amounts. If you do not file a return because your total income is below the filing threshold, you do not need to report it.

What if my bank sent me a 1099-INT with the wrong amount?

Contact your bank immediately and ask them to issue a corrected form (called an amended 1099-INT). The bank will send the corrected version to you and the IRS. Do not file your tax return until you have the correct form, or file an amended return if you already filed.

Can I deduct the taxes I pay on savings interest?

No. You report the interest as income and pay tax on it, but you cannot deduct the tax itself. The interest is the taxable amount — the tax you owe is calculated based on that interest, not subtracted from it.

Does a joint savings account create two 1099-INT forms?

No. The bank sends one 1099-INT for the account, usually in the name of the first account holder listed. If you file taxes jointly with your spouse, you both report the interest on one return. If you file separately, you may need to split the interest between your returns — ask your bank or tax preparer how to handle this.

Is interest from a money market account taxed the same way as a savings account?

Yes. Money market accounts earn interest just like savings accounts, and that interest is taxed as ordinary income. You will receive a 1099-INT and report it the same way on your tax return.