Savings account interest is taxable income

The interest your bank pays you on a savings account counts as ordinary income on your federal tax return. The IRS treats it the same way it treats wages or salary — you owe income tax on the full amount. Your bank will send you a Form 1099-INT each January showing how much interest you earned during the previous year, and you report that figure on your tax return.

The tax you owe depends on your total income and your tax bracket. Someone in the 12% bracket pays roughly 12 cents in federal tax for every dollar of interest earned. Someone in the 22% bracket pays roughly 22 cents per dollar. State income tax, where your state has one, stacks on top of the federal amount. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax income at all, so residents there owe only federal tax on interest.

The bank does not withhold tax automatically unless you ask it to. Most people do not ask, which means you may owe tax when you file your return in April even though no money was taken from your account during the year.

Key Takeaways

  • All interest earned in a savings account is taxable as ordinary income at both federal and state levels (except in states with no income tax).
  • Your bank reports the interest on Form 1099-INT, which arrives by January 31 and must be included on your tax return.
  • The amount of tax you owe depends on your tax bracket — higher earners pay a higher percentage on the interest.
  • You can ask your bank to withhold tax from interest payments, though most people do not and instead pay the tax when they file.
  • Interest under $10 may not require a Form 1099-INT, but you still owe tax on it if you report all income accurately.

When you receive the Form 1099-INT

Banks and credit unions send Form 1099-INT to customers who earned $10 or more in interest during the calendar year. The form arrives by January 31 and shows the total interest paid to you in box 1. A copy also goes to the IRS, so the agency knows how much interest you received.

If you earned less than $10, your bank may not send a form, but you still owe tax on that interest. The IRS expects you to report all income, regardless of whether you receive a 1099-INT. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one, and you add all the interest together on your return.

Keep the 1099-INT with your tax records. You do not send it to the IRS — the bank already did — but you need it to fill out your return accurately and to prove your numbers if the IRS ever asks.

How much tax you actually owe

The tax on savings interest depends entirely on your tax bracket, which is determined by your total income for the year. If you earned $50,000 in wages and $200 in interest, that $200 is taxed at whatever rate applies to your highest dollar of income.

For the 2024 tax year, federal tax brackets for single filers range from 10% for income under $11,600 to 37% for income over $578,100. Married couples filing jointly have higher thresholds. Your state may add 3% to 13% depending on where you live. A person in the 22% federal bracket plus a 5% state bracket owes roughly 27 cents in total tax per dollar of interest.

The math is straightforward: multiply your interest by your combined federal and state tax rate. If you earned $500 in interest and your rate is 27%, you owe about $135 in tax on that interest. That amount comes due when you file your return, unless you asked the bank to withhold it during the year.

Requesting tax withholding from your bank

You can tell your bank to withhold a percentage of your interest payments and send that money to the IRS on your behalf. This works the same way as tax withholding from a paycheck — the money never reaches your account. To set it up, contact your bank and ask for a Form W-9 or ask about their withholding process. Some banks handle this online; others require a form or a phone call.

You choose the withholding percentage. Common choices are 10%, 20%, or 25%, though you can request any amount. If you withhold 20% and earn $500 in interest, the bank sends $100 to the IRS and deposits only $400 to your account. When you file your tax return, that $100 counts as a payment toward your tax bill.

Withholding is optional and many people skip it because interest rates on savings accounts are low enough that the tax owed is small. But if you have a large balance earning significant interest, withholding can prevent a surprise tax bill in April.

Interest from different account types

All interest is taxable, regardless of the account type. A high-yield savings account, money market account, or certificate of deposit (CD) all generate taxable interest. The only exception is a Roth IRA or Roth 401(k), where interest and growth are tax-free as long as you follow the withdrawal rules. Interest in a traditional IRA or traditional 401(k) is also not taxed when earned, but you pay tax when you withdraw the money in retirement.

If you have a savings account in a child's name, the interest is taxable to the child, not to you as the parent. However, there is a special rule called the kiddie tax that may apply if the child is under 18 and has unearned income above a certain threshold — in that case, some or all of the interest may be taxed at the parent's rate instead of the child's rate. The threshold changes yearly; for 2024 it is $1,300. A tax professional can help you understand whether this affects your situation.

Reporting interest on your tax return

When you file your federal return, you report interest income on Schedule 1 (Form 1040), line 8. If you use tax software, it usually asks you to enter the amount from your 1099-INT forms, and the software fills in the right line automatically. If you file by hand, add up all the interest from all your 1099-INT forms and enter the total.

The interest then flows into your adjusted gross income (AGI), which affects your tax bracket and may affect other parts of your return, such as whether you can claim certain deductions or credits. For most people, the effect is small because savings account interest is modest, but it is still part of your total income picture.

If you requested withholding from your bank, that withholding amount appears on your 1099-INT in box 4. When you file your return, the tax software or your tax preparer will account for that withholding as a payment toward your total tax bill. If you withheld more than you owe, you get a refund; if you withheld less, you owe the difference.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

Yes. The $10 threshold only determines whether your bank sends you a Form 1099-INT. You still owe tax on all interest income, even if it is $5 or $1. Report it on your return to be accurate, though the IRS is unlikely to pursue someone over a few dollars.

What if I have interest from a joint account?

The bank reports the full interest amount on a 1099-INT. You and the account holder must decide how to split it for tax purposes — usually 50/50 unless you have a different agreement. Each person reports their share on their own tax return. Coordinate with the other account holder so you do not both report the full amount.

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

No. You report the full interest amount on your return. Savings account fees are not deductible. However, if your bank charged you a fee that reduced your interest below zero (you lost money), you report zero interest, not a negative number.

Does interest from a CD count as taxable income?

Yes. CDs earn interest just like savings accounts, and that interest is fully taxable. You report it the same way — on the 1099-INT your bank sends you. If you withdraw a CD early and pay a penalty, you can deduct that penalty from your interest income on your return.

What if my bank sent me the wrong 1099-INT amount?

Contact your bank immediately and ask them to issue a corrected form (Form 1099-INT with a "Corrected" box checked). Once you receive the corrected form, file an amended return if you already filed. Keep records of your communication with the bank in case the IRS questions the discrepancy.