Savings account interest counts as ordinary income, not investment income, for tax purposes
The interest your savings account earns is taxed as ordinary income by the IRS, the same way wages or salary are taxed. It is not treated as investment income, which has different tax rules and sometimes lower tax rates. This matters because it affects how much you owe in federal taxes each year and how you report it on your tax return.
The bank or credit union holding your account will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. You report this amount on your federal tax return as income. Some states also tax savings account interest as ordinary income, though a few states exempt it entirely.
The amount of interest you earn depends on the account's annual percentage yield (APY) and your balance. A savings account with 4.5% APY on $10,000 generates $450 in interest over a year—all of which is taxable income. Even high-yield savings accounts, which offer better rates than traditional savings accounts, produce ordinary income, not investment income.
Key Takeaways
- Savings account interest is taxed as ordinary income at your regular tax rate, not at the lower investment income rates that apply to capital gains or dividends.
- You must report savings account interest on your federal tax return if you earned $10 or more in a calendar year, using the Form 1099-INT the bank sends you.
- High-yield savings accounts produce ordinary income just like regular savings accounts, despite offering higher interest rates.
- Some states do not tax savings account interest, but most treat it the same way the federal government does.
- Interest earned in a tax-advantaged account like a Roth IRA or 529 plan is not taxed in the year it is earned, even though it would be ordinary income outside those accounts.
How the IRS classifies savings account interest
The IRS groups income into categories, and savings account interest falls into the broadest one: ordinary income. Ordinary income includes wages, self-employment earnings, interest, and most other money you receive. It is taxed at your marginal tax rate—the percentage that applies to your highest dollars of income for the year.
Investment income, by contrast, includes capital gains (profit from selling stocks or property) and may have access to dividends (dividends from certain stocks held for a set period). These often receive preferential tax treatment, meaning they may be taxed at 0%, 15%, or 20% depending on your income level, rather than at your ordinary income rate.
Because savings account interest is ordinary income, it does not benefit from these lower rates. If you are in the 24% tax bracket, every dollar of savings interest is taxed at 24%. If you are in the 35% bracket, it is taxed at 35%. This is true regardless of whether the account is a high-yield savings account, money market account, or traditional passbook savings account.
Reporting savings interest on your tax return
Banks and credit unions report interest to both you and the IRS using Form 1099-INT. You will receive this form by January 31 if you earned $10 or more in interest during the previous calendar year. The form shows the total interest paid to your account during that year.
On your federal tax return, you report this amount on Schedule 1 (Form 1040), which is where you list other types of income beyond wages. The total then flows to your main tax return. If you have multiple savings accounts at different banks, you may receive multiple 1099-INT forms—you report the interest from each one.
If you earned less than $10, the bank is not required to send you a 1099-INT, but you still owe tax on that interest. You must report it on your return even if you do not receive a form. Keep your own records of interest earned in accounts that fall below the reporting threshold.
State taxes on savings account interest
Most states tax savings account interest as ordinary income, following the federal approach. However, some states have different rules. A handful of states do not tax interest income at all, which means residents in those states owe federal tax on savings interest but not state tax.
Other states tax interest but offer exemptions for certain types of accounts or savers. For example, some states exempt interest earned by people over a certain age, or interest below a threshold amount. A few states tax only interest above a specific dollar figure, leaving smaller amounts untaxed.
Your state's tax department website will show whether your state taxes savings interest and under what conditions. If you live in a state with no income tax, you owe nothing to the state on savings interest, though you still owe federal tax.
Interest in tax-advantaged accounts versus regular savings
Interest earned inside a Roth IRA, traditional IRA, or 529 education savings plan is not taxed in the year it is earned, even though it would be ordinary income if earned in a regular savings account. This is one of the main benefits of these accounts—your money grows without annual tax drag.
In a Roth IRA, interest and other earnings are never taxed, as long as you follow the account rules. In a traditional IRA, interest is not taxed while the money sits in the account, but you pay ordinary income tax when you withdraw it in retirement. In a 529 plan, interest used for may have access to education expenses is not taxed; interest withdrawn for other purposes is taxed as ordinary income plus a 10% penalty.
This tax deferral or tax-free treatment is why financial advisors often recommend maxing out these accounts before putting additional savings into a regular savings account. The tax savings compound over time, especially if you are in a higher tax bracket.
How much tax you owe on savings interest
The tax you owe on savings interest depends on your total income for the year and your tax bracket. If you earned $50,000 in wages and $500 in savings interest, your taxable income is $50,500. The $500 is taxed at whatever rate applies to your top dollars of income.
For 2024, if you are single and your income puts you in the 22% bracket, the $500 in interest costs you $110 in federal tax. If you are in the 24% bracket, it costs $120. State tax, if your state taxes interest, adds another layer on top.
This is why the interest rate on your savings account matters less than it might seem. A high-yield savings account paying 4.5% sounds better than one paying 1%, but after taxes, the real return is lower. At 4.5% in the 24% bracket, your after-tax return is about 3.42%. At 1%, it is about 0.76%.
Frequently Asked Questions
Do I have to report savings interest if I earned less than $10?
Yes. The bank does not have to send you a 1099-INT, but you still owe tax on all interest earned. Keep your own records and report it on your return. The IRS can see your account activity through other means, so underreporting is risky.
Is interest from a money market account treated differently than savings account interest?
No. Money market accounts, savings accounts, and checking accounts that earn interest all produce ordinary income taxed the same way. The account type does not change the tax classification—only the interest rate and account features differ.
Can I deduct savings account interest as a loss?
No. Interest is income, not a deductible expense. You cannot offset it against other income or claim it as a loss. You report it as income and pay tax on it at your ordinary income rate.
What if I earned interest in multiple savings accounts?
You report the total interest from all accounts. If each account earned $10 or more, you will receive a separate 1099-INT from each bank. Add them all together on your tax return. If some accounts earned less than $10, track that interest yourself and include it in your total.
Does interest from a joint savings account get split between owners for tax purposes?
Not automatically. The bank reports all interest to the Social Security number listed as the primary account holder on the 1099-INT. If you and another person own the account jointly, you need to work out how to split the tax liability based on your actual ownership share and report it correctly on your individual returns. Keep documentation of this arrangement.