Your savings account balance itself is not taxable, but the interest it earns is

The money you deposit into your savings account belongs to you and is not subject to income tax. However, the interest your bank pays you on that balance is taxable income to the IRS and to your state tax authority. This means if your account earned $50 in interest over the year, you owe tax on that $50 — not on your original deposit.

The bank reports this interest to you and to the IRS on a Form 1099-INT each January. You then report it as income on your tax return. The amount of tax you owe depends on your overall income and tax bracket, not on the size of your savings account.

If your account earned less than $10 in interest during the year, your bank may not send you a 1099-INT, but you still owe tax on that interest if you file a return. The threshold for reporting varies slightly by bank and account type, so check your year-end statements.

Key Takeaways

  • Interest earned on savings accounts is taxable income; your principal deposit is not.
  • Banks report interest of $10 or more on Form 1099-INT, which they send to you and the IRS in January.
  • You report this interest as income on your tax return, and the tax owed depends on your tax bracket.
  • High-yield savings accounts earn more interest, which means a larger taxable amount, though the after-tax return may still be higher than traditional savings accounts.

How the IRS knows about your savings interest

When you open a savings account, you provide the bank with your Social Security number or tax ID. At the end of each calendar year, the bank calculates all interest paid to that account and reports it to both you and the IRS on Form 1099-INT. This form arrives by January 31 of the following year.

The IRS receives a copy of every 1099-INT issued. When you file your tax return, the IRS matches the interest income you report against the 1099-INT on file. If you do not report the interest, the IRS will notice the discrepancy. This is one of the most commonly audited items on individual returns because the matching is automatic.

If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each bank. You must add all of these together and report the total on your return.

When you owe federal tax versus state tax on savings interest

Federal income tax applies to all savings interest earned by U.S. residents. However, state income tax depends on where you live. Nine states have no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividend income, though many savings accounts are exempt). If you live in any other state, you owe state tax on your savings interest in addition to federal tax.

Some states offer tax-advantaged savings accounts or accounts for residents over a certain age with lower tax rates on interest. Check your state's tax authority website or ask your bank whether your account qualifies for any exemptions.

Your total tax bill on savings interest is the sum of your federal rate plus your state rate. For example, if you are in the 22% federal bracket and your state charges 5%, you owe 27% of your interest in tax.

How much interest triggers a tax reporting requirement

Banks must report interest of $10 or more on Form 1099-INT. However, this does not mean you owe tax only if you earned $10 or more. If you earned $8 in interest and file a tax return, you still owe tax on that $8. The $10 threshold is only the point at which the bank is required to send you a formal 1099-INT.

If you earned less than $10 and your bank does not send a 1099-INT, you should still report the interest on your return if you file one. Keep your year-end account statements as proof of the amount earned. Some taxpayers miss this because they assume no 1099-INT means no reporting requirement — that assumption is incorrect.

If you have multiple accounts at the same bank, the bank may combine the interest from all of them before deciding whether to issue a 1099-INT. Ask your bank how they handle this if you have several accounts.

High-yield savings accounts and their tax impact

High-yield savings accounts pay significantly more interest than traditional savings accounts — sometimes 4% to 5% annually compared to 0.01% at a traditional bank. This higher interest is taxable just like any other savings interest, so your tax bill will be larger. However, even after paying tax on the higher interest, you typically come out ahead compared to a traditional account.

For example, $10,000 in a high-yield account earning 4.5% annually generates $450 in interest. If you are in the 24% federal tax bracket and your state charges 5%, you owe $261 in tax, leaving you with $189 in after-tax earnings. The same $10,000 in a traditional account earning 0.01% generates $1 in interest and $0.24 in tax, leaving you with $0.76. The high-yield account still wins by a large margin.

Some people move money between high-yield accounts to chase promotional rates. Each account will issue its own 1099-INT, so you will need to add all of them together when you file your return.

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

If your bank did not send you a 1099-INT by February 15, contact the bank directly. Ask for a copy or ask them to reissue it. Keep a record of your request and their response. If the bank cannot locate the form, ask for a written statement of the interest earned on your account during the year.

If you file your return before receiving the 1099-INT, you can file an amended return once it arrives. Use Form 1040-X to amend a prior year return. However, it is better to wait for the 1099-INT before filing if possible, since the IRS will eventually match your return against it anyway.

If your bank closed during the year or was acquired by another bank, contact the acquiring bank or the FDIC to locate your 1099-INT. Do not assume the interest was not reported just because you cannot find the form immediately.

Savings accounts held in trust or for minors

If a parent opens a savings account in a child's name, the interest is taxable to the child, not the parent. The bank will issue the 1099-INT in the child's name and Social Security number. The child (or the parent on the child's behalf) must report this interest on the child's tax return.

For 2024, a dependent child with less than $1,300 in unearned income (interest, dividends, and capital gains combined) typically does not owe federal income tax, though they may still need to file to recover any tax withheld. Check the IRS website for the current year's threshold, as it changes annually.

If you hold a savings account in trust for another person, the interest is taxable to the beneficiary of the trust, not to you as the account holder. The trustee should report the interest on the trust's tax return or distribute it to the beneficiary for reporting on their individual return, depending on the trust structure.

Frequently Asked Questions

Do I owe tax on money I transfer between my own savings accounts?

No. Transferring money from one account to another is not a taxable event. You only owe tax on the interest the money earns, not on moving the principal itself. If you move $5,000 from Account A to Account B, you owe no tax on the transfer, but you do owe tax on any interest either account earned.

What if my savings account earned interest but the bank made an error and did not send a 1099-INT?

You still owe tax on the interest. Report it on your return based on your account statements. Contact the bank and ask them to issue a corrected 1099-INT. If they refuse or cannot, file your return with the interest reported and keep documentation of your attempt to obtain the form. The IRS may contact you later, but you will have evidence that you reported the income in good faith.

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

No. You report the gross interest the bank paid you, not the net amount after fees. Savings account fees are generally not deductible on your personal tax return. However, if you use the account for business purposes, you may be able to deduct fees as a business expense on your business return.

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

Yes. Money market accounts are treated the same as savings accounts for tax purposes. The interest is reported on Form 1099-INT and is taxable as ordinary income. The bank will report it to the IRS just as they do for a traditional savings account.

What happens if I close my savings account mid-year?

You still owe tax on all interest earned up to the date you closed the account. The bank will report this interest on a 1099-INT for that year. Closing the account does not erase the tax obligation or change the reporting requirement.