Interest counts as ordinary income on your federal tax return
Yes. The interest your savings account earns is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on the full amount. Your bank or credit union will send you a Form 1099-INT at the end of the year showing how much interest you earned, and you report that number on your tax return.
The amount of tax you pay depends on your total income and your tax bracket. If you earned $50 in interest and you're in the 22% tax bracket, you'll owe roughly $11 in federal tax on that interest. If you earned $500 and you're in the 12% bracket, you'll owe roughly $60. The exact amount varies based on your filing status, other income, and deductions.
Most states also tax savings account interest as income, though a few states don't have income tax at all. Check your state's tax rules or ask your accountant whether you owe state tax on the interest you earned.
Key Takeaways
- Your bank will report all savings interest on a Form 1099-INT, which you must include on your federal tax return.
- The tax you owe on interest depends on your tax bracket — the higher your income, the higher the percentage you'll pay.
- Most states tax savings interest as ordinary income, but a handful of states have no income tax.
- You report interest income even if the amount is small — there's no minimum threshold before it becomes taxable.
- High-yield savings accounts earn more interest, which means more tax owed, but the after-tax return is usually still better than traditional savings accounts.
When your bank sends you the 1099-INT form
Banks and credit unions are required to send you a Form 1099-INT if you earned $10 or more in interest during the year. You'll receive it by January 31 of the following year. The form shows the total interest paid to you and goes to both you and the IRS, so the IRS already knows about the income before you file your return.
If you earned less than $10, your bank may not send a 1099-INT, but you still owe tax on that interest. You'll need to track it yourself and report it on your return. Check your bank statements or your online account to find the exact amount.
If you have accounts at multiple banks, you'll receive a separate 1099-INT from each one. Add all the interest together when you file your return.
How interest income affects your tax bracket and refund
Interest income is added to your other income — wages, self-employment income, investment gains — to calculate your total taxable income. If your total income pushes you into a higher tax bracket, you'll pay a higher percentage on all your income, not just the interest.
For example, if you earn $45,000 in wages and $500 in interest, your taxable income is $45,500. That extra $500 might push you from the 12% bracket into the 22% bracket, depending on your filing status. In that case, you'd owe more tax than if you had earned only wages.
Interest income can also reduce a tax refund or turn a refund into a tax bill. If you were expecting a refund based on your wages alone, the interest you earned will lower that refund. If you owe taxes, the interest will increase what you owe.
The difference between federal and state taxes on interest
Federal tax is required in all 50 states. You report interest income on your Form 1040 and pay federal tax based on your bracket.
State tax varies. Most states tax interest as ordinary income at their state income tax rate. A few states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all, so you won't owe state tax on interest there. New Hampshire and Tennessee tax only interest and dividend income, not wages.
If you live in a state with income tax and earned interest, you'll need to report it on your state return as well. The amount you owe depends on your state's tax rate and your income level.
Reporting interest on your tax return
You report interest income on Schedule 1 (Form 1040), which is part of your federal tax return. The line for interest income is straightforward — you enter the total from your 1099-INT form or your own records if you earned less than $10.
If you use tax software, it will usually walk you through entering the 1099-INT information. If you file by hand or with a tax professional, give them all your 1099-INT forms and any records of interest earned below the $10 threshold.
For state returns, follow your state's instructions. Most states have a similar line for interest income on their income tax form.
Interest earned in a CD or money market account
Interest from certificates of deposit (CDs) and money market accounts is taxed the same way as savings account interest. Your bank will send you a 1099-INT for any interest over $10, and you report it on your federal and state returns.
CDs often earn higher interest than savings accounts, which means you'll owe more tax on the interest. However, the after-tax return is usually still higher than a traditional savings account. If you earn $200 in interest from a CD and owe $44 in federal tax (at 22%), you keep $156 — more than you'd earn in most regular savings accounts.
If you withdraw money from a CD before the maturity date, you may owe an early withdrawal penalty, but that penalty is separate from the tax on interest. You still report the interest earned as income.
Interest in retirement accounts and tax-advantaged accounts
Interest earned inside a traditional IRA, 401(k), or other retirement account is not immediately taxable. The money grows tax-deferred, and you pay tax only when you withdraw it in retirement. This is one major advantage of retirement accounts — you don't file a 1099-INT for interest earned inside them.
Interest in a Roth IRA is also not taxable when earned, and may have access to withdrawals in retirement are tax-free. A 529 college savings plan works similarly — interest grows tax-free if used for education expenses.
If you have both regular savings accounts and retirement accounts, only the interest from regular savings accounts is reported on a 1099-INT and taxed each year.
Frequently Asked Questions
Do I have to report interest if I only earned a few dollars?
Yes. There's no minimum amount of interest that's tax-free. If you earned $1 in interest, it's technically taxable income. However, your bank only sends a 1099-INT if you earned $10 or more. For amounts under $10, you track it yourself and report it on your return. Most people with very small amounts won't face penalties, but the income is still technically taxable.
Can I deduct savings account fees from the interest I earned?
No. You report the full interest amount as income. Savings account fees are not deductible on your personal tax return. However, if you have significant investment expenses or are self-employed, you may be able to deduct certain costs — ask a tax professional about your specific situation.
What if I earned interest but didn't receive a 1099-INT?
Contact your bank and ask them to send it. If you earned $10 or more, they're required to send it by January 31. If you earned less than $10 and they didn't send a form, you still need to report the interest on your return. Check your year-end statement or online account history for the exact amount.
Does interest in a high-yield savings account get taxed differently?
No. High-yield savings accounts earn more interest, so you'll owe more tax, but the tax treatment is identical to a regular savings account. You receive a 1099-INT and report it as ordinary income. The higher interest rate means a higher tax bill, but your after-tax earnings are usually still better than a traditional account.
If I move money between my own savings accounts, is that taxable?
No. Transferring money between your own accounts is not income. Only the interest the money earns is taxable. If you move $5,000 from one savings account to another, that's not a taxable event — but any interest that money earns in either account is taxable.