Bank interest counts as income the IRS taxes every year
Yes, the interest your savings account earns is taxable income. The IRS treats it the same way it treats wages or salary — you report it on your tax return and pay federal income tax on the full amount. Your bank will send you a Form 1099-INT each January showing how much interest you earned during the previous year, and you use that form to report the income when you file.
The tax you owe depends on your overall income and tax bracket. Someone in the 22% tax bracket pays roughly 22 cents in federal tax for every dollar of interest earned. State income tax may apply on top of that, depending on where you live. A few states do not tax interest income at all, but most do.
The threshold for receiving a Form 1099-INT is $10 or more in interest during the year. If you earned less than that, the bank does not have to send you the form, but you still owe tax on the interest if you had any taxable income that year.
Key Takeaways
- Your bank will send you a Form 1099-INT in January if you earned $10 or more in interest during the previous year.
- You report the interest amount from the 1099-INT on your tax return as ordinary income and pay federal tax at your regular rate.
- Most states also tax savings account interest, though a handful of states do not.
- Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw the money, but interest in a regular savings account is taxed every year.
How the IRS knows about your interest and when you report it
Banks report interest to both you and the IRS using Form 1099-INT. You receive your copy by January 31 each year, showing all the interest paid to your account during the previous calendar year. The bank sends a copy to the IRS at the same time, so the IRS already knows what you earned before you file your return.
When you file your tax return, you enter the interest amount on Schedule 1 (if using Form 1040) or directly on your return form, depending on which tax software or form you use. The interest gets added to your other income to calculate your total taxable income for the year. If you earned interest in multiple accounts at different banks, you add all of it together.
If you earned less than $10 in interest, the bank does not send a 1099-INT, but you still report any interest you earned if you had taxable income that year. Check your bank statements to find the exact amount.
Tax-deferred accounts where interest is not taxed yearly
Interest earned inside a traditional IRA or 401(k) is not taxed each year the way regular savings account interest is. Instead, the interest compounds tax-free until you withdraw the money in retirement, at which point you pay income tax on the entire withdrawal amount. This is one of the main reasons people use these accounts — the tax deferral lets your money grow faster.
A Roth IRA works differently: interest earned inside a Roth is never taxed, even when you withdraw it in retirement, as long as you follow the withdrawal rules. This makes Roth accounts especially valuable if you expect to be in a higher tax bracket later.
A regular savings account, money market account, or certificate of deposit (CD) held outside a retirement account does not get this tax deferral. Interest is taxed every year, regardless of whether you withdraw the money or leave it in the account.
State income tax on savings account interest
Most states tax savings account interest as ordinary income at the same rate they tax wages. The state tax rate varies widely — from under 3% in some states to over 13% in others. Your state tax is separate from federal tax, so you may owe both.
A small number 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 only federal tax on your savings interest. If you moved during the year or earned interest in an account in a different state, the rules can get complicated — check with your state tax authority or a tax preparer.
Some states offer limited breaks for interest earned by seniors or on certain types of accounts, but these are rare and usually apply only to small amounts. Your bank statement or the 1099-INT will not show state tax withholding — you handle state tax when you file your state return.
What happens if you do not report interest income
The IRS matches the 1099-INT your bank sends against your tax return. If you do not report the interest, the IRS will notice the discrepancy and send you a notice. You will owe the tax you should have paid, plus interest on that amount (currently around 8% per year) and potentially a penalty for underpayment.
The penalty for failing to report income is usually 20% of the unpaid tax, though it can be lower if you have a reasonable cause for the mistake. If the IRS determines the failure was intentional, the penalty can be much higher. Even small amounts of unreported interest can trigger an audit or notice.
If you realize you missed reporting interest in a prior year, you can file an amended return (Form 1040-X) for that year. Filing an amended return voluntarily before the IRS contacts you often results in lower or no penalties.
Interest rates and how much tax you might owe
The amount of tax you owe depends on two things: how much interest you earned and your tax bracket. Interest rates on savings accounts vary by bank and change frequently. As of late 2024, high-yield savings accounts offer rates between 4% and 5.5% annually, while traditional savings accounts often pay less than 1%.
If you have $10,000 in a high-yield account earning 5% annually, you earn $500 in interest. If you are in the 22% federal tax bracket, you owe roughly $110 in federal tax on that interest. Add state tax (if your state taxes interest) and your total tax bill could be $150 or more, depending on your state rate.
The higher your overall income, the higher your tax bracket and the more tax you owe on the same amount of interest. Someone in the 37% bracket pays significantly more tax on the same $500 in interest than someone in the 12% bracket.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
The bank does not send a 1099-INT for interest under $10, but you still owe tax on it if you had any taxable income that year. Report the actual amount you earned based on your bank statements, even if it is $5 or $2.
Can I avoid taxes on savings account interest by moving my money?
No. Interest is taxed in the year you earn it, regardless of whether you move the money to a different bank or account afterward. The tax is based on when the interest was credited to your account, not when you withdraw it.
What if my bank sent me a 1099-INT but I did not earn that much interest?
Contact your bank immediately. Errors happen — the bank may have credited interest to the wrong account or made a calculation mistake. Ask the bank to issue a corrected 1099-INT. If you already filed your return, you may need to file an amended return once the corrected form arrives.
Is interest from a joint savings account taxed differently?
The interest is taxed to whoever owns the account or, if both owners are equal, it may be split. The bank will issue the 1099-INT to the primary account holder or both, depending on how the account is registered. Check with your bank about how they report interest on joint accounts.
Do I owe tax on interest I did not withdraw?
Yes. You owe tax on interest in the year it is earned and credited to your account, whether you withdraw it or leave it there to compound. The IRS taxes the interest income, not the withdrawal of money.