Interest income counts as ordinary income on your federal tax return

Any interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or salary — you report it, and you owe federal income tax on it at your regular tax rate. Most states also tax savings account interest as part of your state income tax, though a few states do not.

Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. You use this form to report the interest on your tax return. Even if you do not receive a 1099-INT, you still owe tax on any interest you earned — the $10 threshold is just when the bank is required to report it to you and the IRS.

The amount of tax you owe depends on your total income and your 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 roughly 12 cents per dollar. State tax rates vary by state.

Key Takeaways

  • Your bank reports interest income to the IRS on Form 1099-INT if you earned $10 or more, and you must report it on your tax return regardless of whether you receive the form.
  • Interest is taxed as ordinary income at your federal tax rate, which ranges from 10% to 37% depending on your total income and filing status.
  • Most states tax savings account interest as part of state income tax, but a handful of states do not tax interest income at all.
  • You report interest income on Schedule 1 (Form 1040) or on your state income tax return, depending on the form your state uses.

How the IRS knows about your interest income

Banks are required to report interest payments to both you and the IRS. If your account earned $10 or more in interest during the calendar year, your bank mails you a Form 1099-INT by January 31 of the following year. The form shows the total interest paid to that account for the year.

The IRS receives a copy of every 1099-INT issued. Their computers match the forms they receive from banks against the income you report on your tax return. If you do not report interest that appears on a 1099-INT, the IRS will likely catch it and send you a notice asking for the missing tax or an explanation.

If you earned less than $10 in interest, your bank does not have to send you a 1099-INT, but you still owe tax on that interest. Keep your own records of interest earned — most online banks show interest deposits in your transaction history, and you can add them up yourself.

Where to report interest income on your tax return

On your federal return, you report interest income on Schedule 1 (Form 1040), which is part of the standard 1040 package. The interest goes on the line labeled "Interest" under "Income." If you use tax software, it will ask you for your interest income and place it in the correct spot automatically.

If you have multiple savings accounts at different banks, add up all the interest from all accounts and report the total as one number. You do not need to list each account separately on your federal return, though you should keep the 1099-INT forms or your own records in case the IRS asks.

For state taxes, the process varies. Some states use a similar schedule; others ask for interest income directly on the main state return form. Check your state's tax instructions or use state tax software that walks you through the process.

How your tax bracket affects what you owe

The federal tax rate you pay on interest depends on your total income for the year. The IRS uses tax brackets — ranges of income that are taxed at the same rate. For 2024, the brackets range from 10% (the lowest) to 37% (the highest).

If your total income pushes you into a higher bracket, your interest income is taxed at that higher rate. For example, if you earn $50,000 in wages and $500 in interest, that $500 is taxed at whatever bracket your $50,500 total income falls into, not at a separate rate.

This matters because it means the tax cost of interest is not the same for everyone. Someone earning $30,000 a year might pay 12% tax on interest, while someone earning $200,000 might pay 35% tax on the same amount of interest. Use the IRS tax bracket tables on their website to see which bracket applies to your situation.

States that do not tax interest income

A small number of states do not tax interest income at all. These states are: Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe federal tax on your savings account interest but no state tax.

New Hampshire and Tennessee have a special rule: they do not tax interest income, but they do tax dividends from stocks and mutual funds. If your savings account interest is your only investment income, you owe nothing to those states.

All other states tax interest income as part of their regular income tax. State rates vary — some are as low as 1%, others as high as 13%. Check your state's tax website or your state tax return instructions to confirm the rate that applies to you.

What happens if you do not report interest income

If you do not report interest income that appears on a 1099-INT, the IRS will eventually notice. Their matching system flags returns where reported income does not match the 1099s on file. You will receive a notice asking you to pay the tax owed plus interest on the unpaid amount (usually around 8% per year) and possibly a penalty.

The penalty for not reporting income is typically 20% of the unpaid tax, though it can be lower if you have a reasonable explanation. If the IRS believes you intentionally hid income, the penalty can be higher — up to 75% in cases of fraud.

If you simply forgot to report interest, contact the IRS as soon as you realize the mistake. Filing an amended return (Form 1040-X) before the IRS contacts you shows good faith and may reduce or eliminate penalties. The sooner you correct it, the better.

Frequently Asked Questions

Do I owe tax on interest if I earned less than $10?

Yes. The $10 threshold only determines whether your bank must send you a 1099-INT form. You owe federal tax on any interest you earned, no matter how small. Keep your own records of interest deposits and report the total on your tax return.

What if I have savings accounts at multiple banks?

Add up the interest from all your accounts and report the total as one number on your tax return. Each bank sends you a separate 1099-INT if you earned $10 or more at that bank. You do not need to list each one separately on your return — just combine them.

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

No. You report the full interest amount that your bank paid you. Fees are not deductible against interest income on your federal return, though some states may allow limited deductions for investment-related fees. Check your state's rules.

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

Yes. Money market accounts, certificates of deposit (CDs), and other savings products that pay interest are all taxed the same way as regular savings accounts. Your bank reports the interest on a 1099-INT, and you report it as ordinary income on your tax return.

What if my bank made a mistake on my 1099-INT?

Contact your bank immediately and ask them to issue a corrected form (Form 1099-INT with a "Corrected" box checked). Once you receive the corrected form, file an amended return if you already filed. Keep records of your communication with the bank in case the IRS asks questions.