Savings account interest is taxed as ordinary income by the federal government, and most states tax it too

The money you earn from a savings account — called interest — counts as income on your tax return. The IRS treats it the same way it treats wages or salary. You owe federal income tax on every dollar of interest your account generates, no matter how small the amount. Most states also tax savings interest, though a handful do not.

Your bank or credit union will send you a Form 1099-INT each January if your account earned $10 or more in interest during the previous year. This form lists the total interest paid to you. You report this amount on your federal tax return, and the IRS uses the copy the bank sends them to cross-check your return.

The tax rate you pay depends on your overall income and tax bracket — not on the interest rate your bank offers. If you are in the 22% federal tax bracket, you will owe roughly 22 cents in federal tax for every dollar of interest earned. State tax rates vary widely, from zero in states like Florida and Texas to over 10% in states like California.

Key Takeaways

  • All savings account interest is taxed as ordinary income at your federal tax bracket rate, and you must report it on your tax return.
  • Your bank sends you a Form 1099-INT if interest reaches $10 or more in a calendar year, and the IRS receives a copy to verify your return.
  • Most states tax savings interest, but Florida, Texas, Wyoming, and a few others do not.
  • High-yield savings accounts earn more interest but also create a larger tax bill in the same year.
  • You can reduce taxable interest by holding money in tax-advantaged accounts like IRAs or 529 plans instead of regular savings accounts.

When you receive a Form 1099-INT and what it means

Banks and credit unions are required to issue a Form 1099-INT to any account holder whose interest reaches $10 or more during a calendar year. You will receive this form by January 31 of the following year. The form shows the total interest paid to your account during the previous year, broken down by account type if you have multiple accounts at the same institution.

If you have accounts at multiple banks, you may receive several 1099-INT forms — one from each bank. You must add up all the interest from all forms and report the total on your federal tax return. The IRS also receives copies of every 1099-INT issued, so they know how much interest you earned even if you do not report it.

If your interest was less than $10 for the year, your bank does not have to send you a 1099-INT. However, you still owe tax on that interest if you file a return. Some people with very small interest amounts choose not to file a return at all, but this depends on your total income and filing status.

How federal tax brackets affect what you owe

The federal tax you owe on savings interest depends on your tax bracket, which is determined by your total income for the year. If you earn $50,000 in wages and $500 in savings interest, your interest is taxed at the same rate as your highest wage income.

For 2024, federal tax brackets range from 10% for the lowest earners to 37% for the highest. A person in the 12% bracket pays roughly 12 cents per dollar of interest. A person in the 32% bracket pays roughly 32 cents per dollar. This is why the same savings account earning the same interest rate creates different tax bills for different people.

You do not pay tax on the interest until you file your return, usually in April of the following year. The bank does not withhold tax from your interest automatically — the money stays in your account. This means you need to set aside money from other sources to pay the tax bill when it comes due, or you may owe penalties.

State income tax on savings interest

Most states tax savings account interest as ordinary income, using rates that range from roughly 1% to over 13% depending on the state and your income level. However, nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, not wages).

If you live in a state with income tax, you report your savings interest on your state tax return in addition to your federal return. Some states offer small exemptions — for example, Vermont allows a $100 exemption on interest and dividend income — but most do not. A few states tax interest at a flat rate regardless of your tax bracket.

If you move to a different state during the year, you may owe tax to both states on a portion of your interest. The rules for dividing interest between states vary, so check with your state tax authority if this applies to you.

High-yield savings accounts and the tax impact

High-yield savings accounts pay much higher interest rates than traditional savings accounts — sometimes 4% to 5% annually, compared to 0.01% or less at many large banks. This means you earn more money, but you also owe more tax on that money in the same year.

If you have $10,000 in a high-yield account earning 4.5%, you will earn $450 in interest over one year. If you are in the 24% federal tax bracket and live in a state with 5% income tax, you will owe roughly $261 in combined federal and state tax on that $450. This leaves you with about $189 in after-tax gain.

High-yield accounts are still worth using because the interest rate is higher than the tax cost. However, the tax bill is real and should be factored into your planning. If you need the money within a year or two, a high-yield account still makes sense. If you are saving for decades, tax-advantaged accounts like IRAs may be a better choice.

Tax-advantaged alternatives to regular savings accounts

If you want to save money without paying tax on the interest each year, you can use a traditional IRA or Roth IRA. Money in these accounts grows tax-free, and you do not receive a 1099-INT. With a traditional IRA, you pay tax when you withdraw the money in retirement. With a Roth IRA, you pay no tax on withdrawals at all, as long as you follow the rules.

A 529 college savings plan also grows tax-free if the money is used for education expenses. If you have children or grandchildren, this can be a powerful way to save without annual tax bills.

A Health Savings Account (HSA) works similarly — interest grows tax-free as long as you use the money for medical expenses. These accounts are only available if you have a high-deductible health insurance plan.

For most people, the combination of a regular savings account for emergency money and a tax-advantaged account for longer-term savings makes sense. Talk to a tax professional about which approach fits your situation.

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

If your interest was $10 or more but you did not receive a 1099-INT by February 1, contact your bank directly. Ask them to issue the form or provide a statement showing the interest paid. Keep this documentation with your tax records.

If your interest was less than $10, you will not receive a 1099-INT, but you still owe tax on it. Check your account statements to find the exact amount and report it on your return.

If you received a 1099-INT with an incorrect amount, contact your bank immediately. They can issue a corrected form (called a 1099-INT correction) that you and the IRS will both receive. Do not file your tax return until you have the correct form.

Frequently Asked Questions

Do I have to report savings interest if it is less than $10?

You do not receive a 1099-INT for interest under $10, but you still owe tax on it if you file a return. Report the actual amount shown in your account statements. If your total income is very low, you may not be required to file a return at all — check the IRS filing requirements for your age and status.

Can I deduct savings account fees from my interest income?

No. You report the gross interest your bank paid you, not the net amount after fees. However, some investment-related fees may be deductible on your tax return as miscellaneous deductions, though the rules are strict. Consult a tax professional about your specific situation.

What if I earned interest in multiple states?

You report all interest on your federal return. For state taxes, you report interest earned while you lived in each state to that state. If you moved mid-year, each state gets a portion of your interest based on how many months you lived there. Your state tax authority can provide guidance on how to split the amount.

Does a joint savings account create double the tax?

No. The interest is taxed once, but it is split between the account owners based on their ownership percentage. If you and your spouse each own 50%, you each report 50% of the interest on your individual returns. The bank will issue separate 1099-INT forms to each owner showing their portion.

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

Yes. Money market accounts, money market funds, and certificates of deposit (CDs) all generate interest that is taxed as ordinary income. You will receive a 1099-INT for any of these if the interest reaches $10 or more. The tax treatment is identical to a regular savings account.