Interest counts as income the IRS taxes every year

Yes, the interest your savings account earns is taxable income. The bank or credit union pays you interest, and that money is treated the same way the IRS treats wages or other income—you owe federal tax on it, and in most states, you owe state income tax too. The amount you owe depends on how much interest you earned and your overall tax bracket.

The bank reports this interest to the IRS on a Form 1099-INT if you earned $10 or more in interest during the year. You receive a copy, and so does the IRS. You must report this interest on your tax return even if you don't receive a 1099-INT, though the $10 threshold means most people with small savings accounts won't get one.

Interest is taxed in the year you earn it, not when you withdraw the money. If your account earned $50 in interest in 2024, that $50 is taxable income for the 2024 tax year, regardless of whether you leave the money in the account or move it.

Key Takeaways

  • All interest earned on a savings account is taxable income at both federal and state levels (in most states).
  • Banks report interest of $10 or more to the IRS on Form 1099-INT, which you must include on your tax return.
  • Interest is taxed in the year you earn it, even if you don't withdraw the money from the account.
  • High-yield savings accounts earn more interest, which means higher taxable income—the tax rate depends on your overall income and tax bracket.
  • You can reduce taxable interest by holding savings in tax-advantaged accounts like Roth IRAs or 529 plans, though these have contribution limits and withdrawal rules.

How the IRS taxes interest at different income levels

The tax you owe on interest depends on your tax bracket—the percentage rate applied to your total income. If you earn $50 in interest and you're in the 22% tax bracket, you owe roughly $11 in federal tax on that interest. If you're in the 12% bracket, you owe roughly $6. The higher your overall income, the higher your tax bracket, and the more you pay on the same amount of interest.

This matters most for people with larger savings balances or high-yield savings accounts. A regular savings account at a major bank might earn 0.01% annually—on $10,000, that's $1 in interest, which is below the reporting threshold. A high-yield savings account might earn 4% to 5%—on the same $10,000, that's $400 to $500 in interest, all taxable.

State income tax applies on top of federal tax in most states. The rate varies by state, but it typically ranges from 1% to 13%. A few states—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—don't tax income at all, so residents of those states owe only federal tax on interest.

When you receive the 1099-INT form and what to do with it

If you earned $10 or more in interest during the calendar year, the bank or credit union sends you a Form 1099-INT by January 31 of the following year. You receive Copy B, the bank keeps Copy A for its records, and Copy C goes to the IRS. The form shows the account number, the bank's name, and the total interest paid.

You must report the interest shown on the 1099-INT when you file your tax return. If you file electronically, the tax software usually has a place to enter this information. If you file by paper, you report it on Schedule 1 (Form 1040) under "Interest" and then transfer the total to your main tax return. The IRS matches what you report to what the bank reported, so underreporting or omitting it triggers a mismatch notice.

If you earned less than $10 in interest, you won't receive a 1099-INT, but you still owe tax on that interest. You report it on your return even without the form. Keep your own records—bank statements or year-end summaries from your online account—to back up the amount you report.

Interest earned in tax-advantaged accounts works differently

Some accounts shelter interest from taxation. A Roth IRA or Roth 401(k) allows interest to grow tax-free, and you owe no tax when you withdraw it in retirement (as long as you follow the withdrawal rules). A 529 education savings plan also grows tax-free if the money is used for may have access to education expenses. A Health Savings Account (HSA) grows tax-free if used for medical costs.

These accounts have strict rules. Roth IRAs limit how much you can contribute each year (for 2024, the limit is $7,000 if you're under 50), and you can't withdraw earnings before age 59½ without a penalty. 529 plans are limited to education expenses; withdrawals for other purposes are taxed and penalized. HSAs require you to be enrolled in a high-deductible health plan.

Regular savings accounts, money market accounts, and certificates of deposit (CDs) do not offer tax-free growth. All interest is taxable in the year earned. Some people use a mix—keeping emergency funds in a regular high-yield savings account (accepting the tax) and putting longer-term money into a Roth IRA or 529 to avoid tax on growth.

How to report interest if you didn't receive a 1099-INT

If you earned less than $10 in interest, the bank won't send a 1099-INT, but you still report it. Check your bank statements or the year-end interest summary in your online account. Add up all the interest paid during the year and report that total on your tax return under "Interest Income" on Schedule 1.

If you had multiple accounts—a savings account at one bank and a CD at another, for example—add the interest from all of them. The IRS doesn't care if the amount is small; if you earned it, it's taxable. Reporting it correctly prevents a mismatch notice later.

If you're filing with tax software, it usually prompts you to enter interest income even if you don't have a 1099-INT. If you're filing by paper, write the total on Schedule 1 and attach it to your Form 1040.

Interest on joint accounts and accounts held by minors

If you hold a savings account jointly with another person, the interest is split based on who owns what portion. If you each own 50%, you each report 50% of the interest. The bank typically reports the full amount to the IRS under one Social Security number (usually the primary account holder's), so you may need to contact the bank to get a corrected 1099-INT or adjust your return to show only your share.

If a parent opens a savings account for a minor child, the interest is the child's taxable income, not the parent's. The child must report it on their own return if they file one. For 2024, a dependent child with interest income of $1,300 or more must file a return. Below that threshold, the child may not need to file, but filing can result in a refund if taxes were withheld.

Some parents use the "kiddie tax" rules to their advantage, putting savings in a child's name to shift income to a lower tax bracket. However, the first $1,300 of unearned income (like interest) is taxed at the child's rate, and amounts above that are taxed at the parent's rate until the child turns 24. Consult a tax professional if you're considering this strategy.

Strategies to minimize tax on savings interest

The most straightforward way to reduce taxable interest is to use tax-advantaged accounts for money you won't need soon. A Roth IRA lets you save $7,000 per year (for 2024) with tax-free growth. If you're saving for education, a 529 plan has no annual contribution limit, though contributions above $18,000 per year per person may trigger gift tax reporting (the rules are complex, and a tax professional can advise).

For money you need to keep accessible, a high-yield savings account still makes sense even though the interest is taxable. Earning 4% interest and paying tax on it leaves you with more money than earning 0.01% interest with no tax. The math favors the higher rate in most cases.

Some people spread savings across multiple banks to stay under the $10 threshold at each one, avoiding the 1099-INT. This doesn't reduce your tax bill—you still owe tax on all interest—but it does reduce paperwork. It's a minor convenience, not a tax strategy.

What happens if you don't report interest income

The IRS receives a copy of every 1099-INT the bank sends you. If you don't report the interest on your return, the IRS will notice the mismatch and send you a notice asking for the missing income. You'll owe the tax plus interest (usually around 8% per year) and may face a penalty of 20% of the underpaid tax.

Even small amounts matter. If you earned $15 in interest and didn't report it, and you're in the 22% federal bracket plus a 5% state bracket, you owe roughly $4 in tax. The IRS will pursue it. The cost of the notice and the penalty often exceeds the tax owed, making it far cheaper to report the interest in the first place.

If you made an honest mistake, you can file an amended return (Form 1040-X) to correct it. The IRS is generally more lenient with small errors if you correct them voluntarily before they contact you.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether the bank sends you a 1099-INT form. You still owe tax on all interest, no matter how small. Report it on Schedule 1 of your tax return using your bank statements as proof.

Is interest on a CD taxable the same way as interest on a savings account?

Yes. CD interest is reported on a 1099-INT if it's $10 or more and is taxed as ordinary income in the year it's earned. Some CDs allow you to defer interest until maturity, but it's still taxable in the year you receive it or the year it's credited to your account, depending on the bank's terms.

Can I deduct savings account interest as a business expense?

No. Interest earned on personal savings is not deductible. If you have a business savings account and earn interest on business funds, that interest is still taxable income to the business, not a deductible expense.

What if I earned interest in one state but moved to another during the year?

You owe state tax to the state where you lived when you earned the interest. If you moved mid-year, you may owe tax to both states, though most states have reciprocal agreements to avoid double taxation. File a part-year resident return in each state and report the interest on the return for the state where you lived when you earned it.

Does interest on money in a savings account for a child count as the child's income?

Yes. Interest earned on an account owned by a child is the child's taxable income, even if a parent opened it and controls it. The child must report it on their own tax return if they file one. For 2024, a dependent child with interest income of $1,300 or more must file.