The money you deposit is not taxable, but the interest your bank pays you is

The dollars you put into a savings account are yours — you already paid tax on that income when you earned it, and the IRS does not tax it again when you move it to savings. But the interest your bank pays you for keeping money there is new income, and it is taxable in the year you earn it. A bank that pays you $50 in interest must report that to the IRS, and you owe federal income tax on those $50 just as you would on $50 in wages.

The tax you owe depends on your total income for the year and your tax bracket. Someone in the 22% bracket pays roughly $11 in federal tax on that $50 in interest. Someone in the 12% bracket pays roughly $6. The exact amount also depends on whether you have other deductions or credits that lower your taxable income.

State income tax works the same way — most states tax savings interest at your ordinary income tax rate, though a handful of states (including Pennsylvania, Illinois, and Mississippi) do not tax interest income at all.

Key Takeaways

  • Money you deposit into savings is not taxable because you already paid tax on it when you earned it.
  • Interest paid by the bank is taxable income in the year you receive it, reported on your tax return.
  • Banks send you a Form 1099-INT if you earn $10 or more in interest, and they send a copy to the IRS.
  • You report savings interest on your federal return even if you do not receive a 1099-INT, and on your state return if your state taxes interest income.
  • High-yield savings accounts pay more interest than traditional savings accounts, which means more tax owed, but the after-tax return is usually still higher.

How banks report your interest to the IRS

If you earn $10 or more in interest during a calendar year, your bank must send you a Form 1099-INT by January 31 of the following year. The bank sends a copy to the IRS at the same time. The form shows how much interest you earned at that bank.

If you have accounts at multiple banks, you will receive a separate 1099-INT from each one. You add all the interest together when you file your tax return. If one bank pays you $8 in interest and another pays $12, you owe tax on the full $20 even though only one bank issued a 1099-INT.

You are responsible for reporting interest income even if you never receive a 1099-INT — for instance, if you earned less than $10 at a bank, or if a bank made an error and did not send one. The IRS has a copy of the form the bank sent them, so mismatches get caught during processing.

What happens if you have very little interest income

If your total interest income for the year is small — say, $15 across all your accounts — you still owe tax on it. But whether you actually have to file a tax return at all depends on your total income and filing status. A single person under 65 with less than $13,850 in total income in 2023 does not have to file a federal return, even if some of that income is interest.

The threshold is higher if you are over 65 or married filing jointly. You can find the exact number for your situation on the IRS website, but the point is this: if your only income is interest and it is below the threshold, you may not have to file. However, if you had taxes withheld from paychecks or made estimated tax payments, you should file anyway to get a refund.

State filing requirements vary. Some states have no income tax at all. Others require you to file if you have any income above a certain threshold, regardless of whether you owe tax. Check your state's tax agency website for the rule in your state.

How to report interest on your tax return

When you file your federal return, you report interest income on Schedule 1 (Form 1040), which feeds into your total income. If you use tax software, you enter the information from your 1099-INT forms, and the software puts it in the right place. If you file by hand or with a tax preparer, you add up all your 1099-INT forms and write the total on the appropriate line.

For state returns, the process is similar — you report interest income on the state version of your return. Some states use a separate schedule; others have a line on the main form. Your state's tax agency website has instructions specific to your state.

You do not deduct the interest you earn. Interest income is added to your other income, and your tax is calculated on the total. The only exception is if you borrowed money to buy a savings account or CD (which is rare and unusual), in which case you might be able to deduct the interest you paid on the loan — but that is a separate issue from the interest you earned.

The difference between high-yield and traditional savings accounts

A traditional savings account at a big bank might pay 0.01% annual interest. A high-yield savings account might pay 4% or 5%. On a $10,000 balance, that is the difference between $1 in annual interest and $400 to $500. The higher interest means higher tax, but the after-tax return is still much better.

If you are in the 22% tax bracket and earn $400 in interest at a high-yield account, you owe roughly $88 in federal tax on it. Your after-tax gain is still $312 — far more than the $0.78 after-tax gain from the traditional account. The tax is a cost, but it does not erase the advantage of the higher rate.

Some people worry that moving to a high-yield account will push them into a higher tax bracket. That is not how tax brackets work. You pay the higher rate only on the income that falls into the higher bracket, not on all your income. If earning $400 in interest moves you from the 12% bracket to the 22% bracket, you pay 22% only on the portion of income above the 12% threshold, not on everything.

Interest from CDs and money market accounts

Certificates of deposit (CDs) and money market accounts work the same way as savings accounts for tax purposes. The interest is taxable income in the year you earn it. You receive a 1099-INT if you earn $10 or more, and you report it on your tax return the same way.

One difference: if you withdraw money from a CD before the maturity date, the bank charges an early withdrawal penalty. That penalty is not tax-deductible, so you pay tax on the full interest even though some of it goes to the penalty. For example, if a CD earns $200 in interest but you withdraw early and pay a $50 penalty, you owe tax on the full $200, and the $50 penalty comes out of your pocket.

If a CD matures in one year and you immediately roll the interest into a new CD, you still owe tax on the interest in the year it was earned, even though you did not withdraw it. The IRS taxes interest when you earn it, not when you spend it.

What to do if you did not receive a 1099-INT

If you earned $10 or more in interest and your bank did not send you a 1099-INT by February 15, contact the bank and ask for it. Banks sometimes send them late, or to an old address if you moved. Give the bank a few days to respond before assuming it is missing.

If the bank confirms it will not send one (because of an error or because the account was closed), ask for a written statement showing how much interest you earned. You can use that to report the income on your tax return. Write a note on your return explaining that you did not receive a 1099-INT but are reporting the income anyway.

If you already filed your return and later discover you missed interest income, you can file an amended return using Form 1040-X. The IRS will recalculate your tax and send you a bill or refund. It is better to catch it yourself than to wait for the IRS to notice the discrepancy.

Frequently Asked Questions

Do I have to pay tax on interest if I am retired and do not work?

Yes. Interest income is taxable regardless of whether you have other income. However, if your total income (including interest) is below the filing threshold for your age and status, you may not have to file a return. Check the IRS threshold for your situation.

What if I earned interest but the bank made a mistake on the 1099-INT?

Contact the bank and ask for a corrected form (called a 1099-INT correction). The bank will send you a corrected copy and send one to the IRS. File your return using the corrected amount. If you already filed, you can amend your return once the corrected form arrives.

Can I deduct the tax I pay on savings interest?

No. Interest income is added to your taxable income, and you pay tax on it at your ordinary rate. You cannot deduct the tax itself. However, if you have other deductions (mortgage interest, charitable donations, etc.), those can lower your overall taxable income and reduce the tax you owe on the interest.

Does a joint savings account get taxed differently?

The interest on a joint account is taxable to whoever owns it. If both owners contributed equally and own it equally, you typically split the interest income. The bank may issue one 1099-INT in one person's name, so you will need to work out who reports what. Consult a tax preparer if the ownership is unclear.

Is interest from a savings account at a credit union taxed the same way?

Yes. Credit unions are not banks, but the IRS treats interest from credit union savings accounts the same as interest from bank accounts. You receive a 1099-INT if you earn $10 or more, and you report it on your tax return the same way.