Interest counts as income the IRS taxes every year
Yes, the interest your savings account earns is taxable. The IRS treats it as ordinary income, the same category as wages or salary. You owe federal income tax on every dollar of interest your bank pays you, no matter how small the amount. Most states tax it too.
The bank reports this interest to you and to the IRS on a Form 1099-INT each January. That form shows exactly how much interest you earned in the previous year. You then report that amount on your tax return 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. Someone in the 12% bracket pays about 12 cents. State income tax varies by where you live — some states have no income tax at all, while others add another 5% to 13%.
Key Takeaways
- Banks report savings account interest to the IRS on Form 1099-INT, which you must include on your tax return.
- The amount of tax you owe on interest depends on your tax bracket, which is based on your total income for the year.
- You receive a Form 1099-INT only if you earned $10 or more in interest during the year, but you still owe tax on smaller amounts.
- High-yield savings accounts earn more interest than traditional savings accounts, which means higher taxable income and potentially higher taxes.
- Some savings vehicles like Roth IRAs and certain 529 college savings plans let interest grow tax-free, though they have contribution limits and rules.
When the bank sends you Form 1099-INT
Your bank mails or emails Form 1099-INT by January 31 each year for any interest paid during the previous calendar year. The form shows the total interest in Box 1. You need this form to file your tax return accurately.
Banks only send Form 1099-INT if you earned $10 or more in interest during the year. If you earned less than $10, the bank does not send the form — but you still owe tax on that interest. You report it on your return anyway, even without the form.
Keep your Form 1099-INT with your tax records. If you file electronically, you do not need to mail the form to the IRS, but you should keep a copy for your records in case of an audit.
How interest rates affect your tax bill
Higher interest rates mean more interest earned, which means more taxable income. A high-yield savings account earning 4% or 5% annually generates far more interest than a traditional savings account earning 0.01%, so your tax bill will be higher.
For example, $10,000 in a high-yield account at 4.5% annual interest earns $450 per year. At a 22% federal tax rate, you owe roughly $99 in federal tax on that interest. The same $10,000 in a traditional account earning 0.01% interest earns only $1, with minimal tax owed.
This does not mean high-yield accounts are a bad choice — you still come out ahead with the higher interest, even after taxes. But it is worth understanding that the better the rate, the more you will owe at tax time.
Tax-advantaged savings alternatives
If you want savings to grow without annual tax bills, certain accounts let interest accumulate tax-free. A Roth IRA lets you contribute up to $7,000 per year (or $8,000 if you are 50 or older), and all interest and growth is never taxed as long as you follow the withdrawal rules. A 529 college savings plan works similarly for education expenses — interest grows tax-free if used for may have access to education costs.
These accounts have trade-offs. Money in a Roth IRA is meant for retirement and has withdrawal penalties if you take it out early. A 529 plan is designed for education, and withdrawals for other purposes trigger taxes and penalties on the earnings portion. Both have annual contribution limits that are much lower than what you might want to save.
A regular savings account remains the most flexible option if you need access to your money without restrictions. You pay tax on the interest, but you can withdraw anytime without penalty.
Reporting interest on your tax return
When you file your federal tax return, you report interest income on Schedule 1 (Form 1040), which feeds into your total income calculation. If you have multiple savings accounts or other interest-bearing accounts, you add up all the interest from all Form 1099-INTs and report the total.
Most tax software walks you through this step — you enter the amount from Box 1 of your Form 1099-INT, and the software places it in the right spot on your return. If you file by hand, you write the total interest income on the appropriate line of Schedule 1.
State tax returns work similarly. Most states that have income tax require you to report interest income on your state return as well. A few states — including Pennsylvania and New Hampshire — do not tax interest and dividend income, so you would skip that step if you live there.
What happens if you do not report interest income
The IRS receives a copy of every Form 1099-INT your bank sends. If you do not report the interest on your tax return, the IRS will notice the mismatch between what the bank reported and what you filed. This can trigger a notice asking you to explain the discrepancy.
Failing to report interest income can result in penalties and interest charges on the unpaid tax. The penalty is usually 20% of the underpaid tax, plus interest that compounds daily. It is far simpler to report the interest when you file, even if the amount is small.
If you made an honest mistake and forgot to report interest in a prior year, you can file an amended return using Form 1040-X. The sooner you correct it, the less interest and penalties will accumulate.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. The bank only sends Form 1099-INT if you earned $10 or more, but you still owe tax on any interest you earned, even $1 or $5. Report it on your tax return using Schedule 1, even without the form.
Can I deduct savings account interest as a loss?
No. Interest income is taxable, but you cannot deduct it as a loss or expense. Interest is treated as ordinary income with no offsetting deduction.
What if I have interest from multiple banks?
Add up all the interest from all your Form 1099-INTs and report the total on Schedule 1 of your federal return. You do not file separate returns for each bank — one total figure covers all of them.
Does a joint savings account change how interest is taxed?
The interest is still taxable to whoever owns the account. If the account is jointly owned, the bank may split the interest between the two owners on separate Forms 1099-INT, or report it all to one person — check with your bank. Either way, the total interest is taxable income to the account owners.
Is interest from a money market account taxed the same way?
Yes. Money market accounts, certificates of deposit (CDs), and other interest-bearing accounts all work the same way — the bank reports interest on Form 1099-INT, and you report it as ordinary income on your tax return.