Savings accounts themselves are tax-free, but the interest they earn is not

The money you put into a savings account and keep there is not taxed. You can deposit $10,000 and it stays $10,000 until you withdraw it. The tax bill comes from the interest your bank pays you on that balance. That interest counts as income to the IRS, and you owe federal income tax on it—and in most states, state income tax as well.

The amount of tax you pay depends on how much interest you earn and what tax bracket you fall into. If you earn $50 in interest over a year, you might owe $10 to $15 in federal tax, depending on your income level. If you earn $500, the tax will be higher. The bank does not withhold this tax automatically; you report it yourself when you file your tax return.

Key Takeaways

  • Your savings account balance is never taxed, but the interest the bank pays you is taxed as ordinary income.
  • Banks report interest earnings to the IRS on a 1099-INT form if you earn $10 or more in a calendar year.
  • You report this interest on your federal tax return even if the bank does not send you a 1099-INT.
  • High-yield savings accounts earn more interest, which means a larger tax bill, but the after-tax return is usually still better than traditional savings accounts.
  • Some savings vehicles like Roth IRAs and 529 plans let interest grow tax-free, but they have contribution limits and withdrawal rules.

How banks report your interest to the IRS

If your savings account earns $10 or more in interest during a calendar year, your bank will send you a Form 1099-INT by January 31 of the following year. This form shows the total interest you earned. The bank sends a copy to the IRS as well, so the IRS knows how much interest you received.

You do not have to wait for the 1099-INT to report the interest. If you earned less than $10, the bank will not send a form, but you still owe tax on that interest if you file a return. Keep your own records of interest earned by checking your monthly statements or your online account.

When you file your federal tax return, you report this interest income on Schedule 1 (Form 1040) or directly on your return, depending on the year and your filing method. The interest is added to your other income and taxed at your ordinary income tax rate—not at a special lower rate.

What tax rate applies to savings account interest

Savings account interest is taxed as ordinary income, meaning it is taxed at the same rate as wages, salary, or self-employment income. If you are in the 22% federal tax bracket, interest is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%. The rate depends on your total income for the year, not on the source of the income.

State income tax also applies in most states. If you live in a state with income tax—such as California, New York, or Illinois—you owe state tax on the interest as well. A few states, including Florida, Texas, and Wyoming, have no state income tax, so residents there owe only federal tax on interest.

Some states exempt interest from state taxation if it comes from certain types of accounts, but this is rare. Check your state's tax agency website or ask your bank whether your state taxes savings account interest.

High-yield savings accounts and the tax impact

A high-yield savings account earns significantly more interest than a traditional savings account—often 4% to 5% annually, compared to 0.01% or less at many big banks. This higher rate means more interest income, which means a larger tax bill. If you have $10,000 in a high-yield account earning 5%, you earn $500 in interest per year. At a 22% federal tax rate, you owe $110 in federal tax on that interest alone.

Despite the higher tax, the after-tax return on a high-yield account is usually still better than a traditional account. If a traditional account earns 0.01% on $10,000, that is $1 in interest, taxed at roughly $0.22. The high-yield account gives you $500 minus $110 in tax, or $390 net gain. The difference is substantial.

The tax on high-yield interest is still ordinary income tax, not a special rate. You report it the same way you would report interest from any other savings account.

Tax-free savings options and their limits

If you want savings account interest to grow without being taxed, you have a few options, though each comes with restrictions. A Roth IRA lets interest and investment gains grow tax-free, and you do not owe tax when you withdraw the money in retirement. However, you can only contribute $7,000 per year (as of 2024, and the limit changes yearly), and you cannot withdraw the money before age 59½ without penalties, except in specific situations.

A 529 college savings plan also grows tax-free if the money is used for education expenses. You can contribute much more than to an IRA—some states allow $235,000 or more per beneficiary—but the money must go toward tuition, room and board, or other may have access to education costs. If you withdraw it for other reasons, you owe tax on the earnings plus a 10% penalty.

A Health Savings Account (HSA) offers tax-free growth if you use the money for medical expenses. You can contribute up to $4,150 per year (as of 2024) if you have individual health coverage, and the money rolls over year to year. Interest and investment gains are never taxed if spent on may have access to medical costs.

Regular savings accounts do not have these tax advantages, but they also have no contribution limits and no withdrawal restrictions. The choice depends on your goals and timeline.

Reporting interest when you file your taxes

When you file your federal tax return, you report interest income on Schedule 1 (Form 1040, line 8b) or directly on your Form 1040, depending on the tax year. If you use tax software, it will prompt you to enter the interest amount. If you file by hand, write the total interest from all your savings accounts on the appropriate line.

If you received a 1099-INT from your bank, the amount on that form should match what you report on your return. If there is a discrepancy, the IRS will notice because they received a copy of the 1099-INT as well. If you earned interest but did not receive a 1099-INT (because it was under $10), you still report it—the IRS expects you to report all income, whether or not a form was issued.

State tax returns work the same way. You report the interest on your state return as well, unless your state has no income tax or specifically exempts savings account interest.

What happens if you do not report interest income

If you do not report interest income on your tax return and the IRS finds out, you can face penalties and interest charges on the unpaid tax. The IRS receives copies of all 1099-INT forms sent to you, so if you earned $10 or more in interest, they have a record. If your return does not show that interest, it will likely be flagged for review.

The penalty for not reporting income is typically 20% of the unpaid tax, plus interest that accrues daily. If you owed $50 in tax on $250 in interest and did not report it, you might end up owing $60 or more by the time penalties and interest are added. The longer you wait to correct it, the more interest accrues.

If you realize you missed reporting interest in a prior year, you can file an amended return using Form 1040-X. It is better to correct the mistake yourself than to wait for the IRS to contact you.

Frequently Asked Questions

Do I owe tax on interest if I earned less than $10?

Yes. The $10 threshold only determines whether your bank sends you a 1099-INT form. You still owe tax on all interest income, no matter how small, and you must report it on your tax return. Keep track of your interest using your monthly statements.

Can I avoid taxes by moving money between savings accounts?

No. Moving money does not create or eliminate interest income. The interest is taxed based on when it was earned, not on which account holds the money. Transferring $5,000 from one account to another does not change your tax obligation.

Is interest from a joint savings account taxed differently?

The interest is taxed the same way, but you and the other account holder may need to split the reported interest for tax purposes. Check with your bank or a tax professional about how to report interest on a joint account, as the rules depend on how the account is titled and your relationship to the other owner.

What if my savings account interest is very small—like $2 for the year?

You still report it. The IRS expects all income to be reported, regardless of amount. If you earned $2 in interest, add it to your return. The tax owed will be minimal, but the reporting requirement remains.

Does a certificate of deposit (CD) get taxed the same way as a savings account?

Yes. Interest from a CD is taxed as ordinary income, just like savings account interest. You report it on your tax return the same way. The bank will send you a 1099-INT if you earn $10 or more in interest during the year.