Interest counts as income the IRS taxes every year

Yes, interest earned on a savings account is taxable income. The bank or credit union pays you interest, and that interest is treated the same way the IRS treats wages or other money you receive — you owe federal income tax on it, and usually state income tax too. This applies to all savings accounts: regular savings, money market accounts, certificates of deposit (CDs), and high-yield savings accounts.

The amount of tax you owe depends on your total income for the year and your tax bracket. If you earn $100 in interest and you're in the 22% tax bracket, you don't automatically owe $22 — you owe tax on that $100 at your marginal rate when combined with all your other income. The exact amount varies based on your filing status, other income sources, and deductions.

Your bank reports the interest you earned to the IRS on a Form 1099-INT each January. You receive a copy, and the IRS receives a copy. When you file your tax return, you report this interest income on your return, and the IRS matches it against what the bank reported.

Key Takeaways

  • Interest earned on savings accounts, money market accounts, and CDs is taxable income at both federal and state levels.
  • Banks report interest to the IRS on Form 1099-INT, which you'll receive by January 31 each year.
  • You report this interest on your tax return; the amount of tax owed depends on your total income and tax bracket for the year.
  • Interest under $10 may not require a Form 1099-INT from the bank, but it's still taxable and should be reported.
  • High-yield savings accounts earn more interest, which means more taxable income — factor this into your planning.

When the bank sends you Form 1099-INT

Your bank or credit union mails or makes available a Form 1099-INT by January 31 of the year following the one in which you earned the interest. If you earned $10 or more in interest during the calendar year, the bank is required to send you this form. If you earned less than $10, the bank may not send a form, but the interest is still taxable.

The form shows the total interest paid to you during that calendar year. If you have multiple savings accounts at different banks, you'll receive a separate 1099-INT from each one. If you have multiple accounts at the same bank, they may be combined into one form or listed separately — this varies by institution.

Keep your 1099-INT forms with your tax records. You'll need the information on them when you file your return. If you don't receive a form by early February, contact the bank directly to request it or ask if they've mailed it to an old address.

How to report interest income on your tax return

When you file your federal tax return using Form 1040, you report interest income on Schedule B (Interest and Ordinary Dividends). You list each source of interest — each bank or account — and the amount from each 1099-INT. Then you transfer the total to line 1b of Form 1040.

If your interest income is $1,500 or less and you have no other investment income to report, you can skip Schedule B and report the total directly on Form 1040 line 1b. Many people with simple tax situations use this shortcut.

For state taxes, you typically report the same interest income on your state return. Most states tax interest the same way the federal government does, though a few states exempt interest from taxation or have different rules. Check your state's tax agency website or your state tax form instructions to see how interest is handled in your state.

Interest on CDs and money market accounts follows the same rules

Certificates of deposit (CDs) and money market savings accounts earn interest just like regular savings accounts, and that interest is taxable in the same way. You'll receive a 1099-INT from the institution holding the CD or money market account, and you report it on your tax return the same way you report savings account interest.

One difference: if you withdraw money from a CD before the maturity date, you may owe an early withdrawal penalty. That penalty is not tax-deductible, but it does reduce the net interest you receive. The 1099-INT shows the interest earned, not the penalty paid, so you report the full interest amount and cannot subtract the penalty on your tax return.

High-yield savings accounts mean higher taxable interest

High-yield savings accounts pay significantly more interest than traditional savings accounts — sometimes 4% to 5% annually compared to 0.01% at a brick-and-mortar bank. This is good for your savings, but it means more taxable income. If you have $10,000 in a high-yield account earning 4.5%, you'll owe tax on $450 in interest that year.

Plan for this when deciding how much to keep in a high-yield account. If you're in a high tax bracket, the after-tax return on a high-yield account may be lower than it appears. For example, if you're in the 24% federal tax bracket and your state taxes at 5%, a 4.5% interest rate nets you roughly 3.2% after taxes. This is still better than most traditional accounts, but it's worth understanding the real return you'll keep.

What happens if you don't report interest income

The IRS receives a copy of every 1099-INT your bank sends you. If you don't report the interest on your tax return, the IRS will notice the mismatch between what you reported and what the bank reported. This can trigger a notice asking you to explain the discrepancy or pay additional tax.

If the IRS determines you intentionally failed to report interest income, you may owe back taxes, plus interest on the unpaid amount, plus penalties. The penalty for negligence is typically 20% of the underpaid tax. If the IRS considers it fraud, the penalty can be as high as 75% of the underpaid tax.

Even small amounts of interest should be reported. It's not worth the risk of an audit or penalty to skip reporting $50 or $100 in interest. The reporting is straightforward, and it takes minutes to add to your tax return.

Frequently Asked Questions

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

Yes. The bank is not required to send you a Form 1099-INT if you earned less than $10, but the interest is still taxable income. You should report it on your tax return. Keep your bank statements as proof of the amount earned.

What if I earned interest in multiple accounts at different banks?

You'll receive a separate 1099-INT from each bank. On Schedule B of your tax return, list each source and amount, then add them together for the total to report on Form 1040. If the total is $1,500 or less and you have no other investment income, you can report the total directly without using Schedule B.

Can I deduct the taxes I pay on interest income?

No. Interest income is added to your other income, and you pay tax on the combined total at your regular tax rate. You cannot deduct the tax owed on interest as a separate item. However, if you itemize deductions, you may be able to deduct investment expenses in some cases — consult a tax professional about your specific situation.

Does interest on a joint savings account get taxed differently?

The interest is taxable to whoever owns the account. If the account is jointly owned, the bank typically reports all interest to both owners on separate 1099-INT forms, or splits it between you. Check with your bank about how they report joint account interest, and make sure each owner reports their share on their own tax return.

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

Contact the bank immediately and ask them to issue a corrected form (Form 1099-INT with a "Corrected" box marked). Once you receive the corrected form, file an amended tax return if you've already filed. Keep both the original and corrected forms with your records.