Interest counts as income on your tax return
Yes, the interest your savings account earns is taxable. The bank or credit union treats it as income you received, and you report it on your federal tax return. The IRS does not care that you did not actively work for it — interest is still money that came to you, and it counts.
Your 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. You use this form to report the interest on your tax return. Even if you do not receive a 1099-INT because your interest was under $10, you still owe tax on whatever you earned — you just have to report it yourself.
The amount of tax you owe depends on your tax bracket. If you are in the 22% federal tax bracket, for example, $100 in interest means roughly $22 in federal tax owed (though state tax may apply too). The higher your income from all sources, the higher your tax bracket, and the more tax you owe on the interest.
Key Takeaways
- Interest earned on savings accounts is reported to the IRS on a 1099-INT form if it totals $10 or more in a calendar year.
- You must report all interest income on your federal tax return, even amounts under $10 that do not trigger a 1099-INT.
- The tax you owe on interest depends on your overall income and tax bracket, not on the interest amount alone.
- High-yield savings accounts earn more interest than traditional savings accounts, which means more tax owed unless the money is in a tax-advantaged account like an IRA.
- State income tax may also apply to savings account interest, depending on where you live.
How the 1099-INT form works
Your bank calculates the interest you earned during the calendar year (January 1 through December 31) and reports it on the 1099-INT. The form shows the total interest in Box 1. If you have accounts at multiple banks, you will receive a separate 1099-INT from each one.
You receive the form by mail or electronically (if you signed up for e-delivery) by January 31. You then enter the interest amount from Box 1 onto your Form 1040 (the main federal tax return form) or Schedule 1, depending on your filing method. If you use tax software, it usually walks you through entering this information.
If you earned interest at multiple banks, you add up all the 1099-INT amounts and report the total. The IRS cross-checks this against the copies of the 1099-INT forms your banks sent them, so underreporting or forgetting to report interest can trigger an audit notice.
When interest is not taxable
Interest earned inside certain retirement accounts is not taxable in the year you earn it. Money in a traditional IRA, 401(k), or 403(b) grows tax-free until you withdraw it in retirement. Interest in a Roth IRA is never taxed, even when you withdraw it, as long as you follow the withdrawal rules.
Interest in a 529 college savings plan is also tax-free if you use the money for may have access to education expenses like tuition or room and board. If you withdraw money for non-education purposes, the interest portion becomes taxable and may face a 10% penalty.
Regular savings accounts, money market accounts, and certificates of deposit (CDs) held outside these retirement accounts are all subject to tax on their interest. The account type does not matter — only whether it is sheltered inside a tax-advantaged account.
High-yield savings accounts and tax
A high-yield savings account earns significantly more interest than a traditional savings account — sometimes 4% to 5% annually compared to 0.01% or less at a brick-and-mortar bank. This higher interest is good for your savings, but it also means more taxable income and more tax owed.
If you have $10,000 in a high-yield account earning 4.5% annually, you earn $450 in interest that year. At a 22% tax bracket, you owe roughly $99 in federal tax on that interest. At a 24% bracket, it is roughly $108. The bank still sends you a 1099-INT for the full $450, and you report all of it.
This does not mean high-yield accounts are a bad choice — the interest you keep after tax is still more than you would earn in a traditional account. But it does mean you should factor the tax into your planning, especially if you are saving for a specific goal and need to know the after-tax amount.
State income tax on savings interest
Most states tax interest income the same way the federal government does. If you live in a state with income tax, you will owe state tax on your savings interest in addition to federal tax. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not have state income tax, so residents owe only federal tax.
State tax rates vary widely. New York taxes interest at rates up to 6.85%, while other states charge 3% or less. Some states offer tax breaks for certain types of savings or for residents over a certain age, but these rarely apply to regular savings account interest.
When you file your state tax return, you report the same interest income you reported to the federal government. Your state uses the 1099-INT form or your own records to verify the amount.
Reporting interest if you did not receive a 1099-INT
If your interest totaled less than $10 for the year, your bank may not send you a 1099-INT. You are still required to report the interest on your tax return. Keep your bank statements or year-end summary from your bank showing the interest earned, and enter the amount on your tax return even though you do not have a 1099-INT to attach.
If you have multiple accounts at the same bank and the combined interest is under $10, the bank will not issue a 1099-INT, but you still report the total. If you have accounts at different banks and each one earned under $10, you add up all the interest from all banks and report the total.
The IRS does not always catch unreported interest under $10, but intentionally omitting it is still tax evasion. It is simpler and safer to report it, especially since the amount is small.
What happens if you underreport or forget interest
The IRS receives a copy of every 1099-INT your bank sends you. If your tax return does not include the interest shown on the form, the IRS will notice. You may receive a notice proposing additional tax owed, plus interest on the unpaid amount and possibly penalties.
If the underreporting was unintentional, you can file an amended return (Form 1040-X) to correct it. The penalty is usually smaller if you catch the error yourself and correct it before the IRS contacts you. If the IRS contacts you first, penalties are typically 20% of the underpaid tax.
Interest accrues on unpaid tax at a rate set quarterly by the IRS — currently around 8% annually. The longer you wait to pay, the more interest accumulates. It is cheaper to report the interest correctly the first time.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. The $10 threshold only determines whether your bank sends you a 1099-INT form. You must report all interest income on your tax return, regardless of the amount. Keep your bank statements as proof of the interest earned.
What if I have interest from a joint account?
The bank reports the full interest amount on a 1099-INT. If the account is truly joint and you both contributed equally, you and the other account holder should each report half the interest on your individual tax returns. Keep documentation of how the account was funded to support this split if the IRS asks.
Can I deduct the tax I owe on savings interest?
No. Interest income is added to your total income, and you pay tax on it at your regular rate. You cannot deduct the tax as an expense. The only way to reduce tax on interest is to move the money into a tax-advantaged account like an IRA or 529 plan.
Does a CD count as interest income the same way?
Yes. Interest from a certificate of deposit is reported on a 1099-INT just like savings account interest and is taxed the same way. If you cash in a CD early and pay an early withdrawal penalty, you can deduct that penalty from the interest income on your tax return.
What if my bank made an error on the 1099-INT?
Contact your bank and ask them to issue a corrected 1099-INT (marked as a correction). They will send the corrected form to you and the IRS. Once you receive it, file an amended tax return using the correct amount. Do this as soon as you discover the error.