Interest counts as ordinary income on your federal tax return
Yes. The interest your savings account earns is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on the full amount. Your bank will report this interest to you and to the IRS on a Form 1099-INT each January, and you report it on your tax return when you file.
The amount of tax you pay depends on your total income and your tax bracket. If you earn $100 in interest and you are in the 22% tax bracket, you will owe roughly $22 in federal tax on that interest (though the exact amount depends on your full tax picture). Some states also tax interest income, though a few do not.
The bank does not withhold tax automatically from interest payments the way an employer withholds from your paycheck. The interest simply deposits into your account, and you are responsible for reporting it when you file your return.
Key Takeaways
- All interest earned in a savings account is taxable as ordinary income at the federal level, reported on Form 1099-INT.
- You owe tax based on your tax bracket — the higher your income, the higher the tax rate on your interest.
- Most states tax savings account interest, but a few states do not, so check your state's rules.
- Banks do not withhold tax from interest payments, so you must report the interest yourself when you file your return.
- Interest earned in tax-advantaged accounts like Roth IRAs or 529 plans may not be taxable, depending on the account type and how you use it.
When the bank sends you Form 1099-INT
Your bank will mail or email you a Form 1099-INT by January 31 each year if you earned $10 or more in interest during that calendar year. This form shows the total interest you earned in that account. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each bank.
You will also receive a copy of the form that the bank sent to the IRS, so the IRS already knows about your interest income. This is why reporting it on your tax return is important — if you do not report it and the IRS notices the mismatch, you may face penalties and interest charges on the unpaid tax.
If you earned less than $10 in interest, the bank may not send you a 1099-INT, but you still owe tax on that interest. You can find the exact amount in your account statements or by logging into your online banking portal.
How your tax bracket affects what you owe
The tax you owe on interest depends on your marginal tax bracket — the tax rate that applies to your last dollar of income. If you earn $50,000 a year and fall into the 22% bracket, and you earn $500 in interest, you will owe roughly $110 in federal tax on that interest (22% of $500). If you earn $200,000 and fall into the 35% bracket, the same $500 in interest costs you roughly $175 in tax.
This is why interest income can push you into a higher tax bracket if you are close to the boundary. If your salary is $170,000 and you earn $5,000 in interest, that $5,000 might push you from the 24% bracket into the 32% bracket, meaning you pay a higher rate on both the interest and some of your other income.
You can estimate your tax bracket using the IRS tax tables published each year, or by using a tax calculator. Your tax software will calculate this automatically when you enter your interest income.
State taxes on savings account interest
Most states tax interest income at your state income tax rate. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not have a state income tax at all, so residents pay no state tax on interest. New Hampshire and Tennessee tax only interest and dividend income, not wages.
If you live in a state with income tax, you will report your interest on your state tax return as well as your federal return. The amount you owe depends on your state's tax rate, which varies from about 3% to over 13% depending on your income and state.
If you moved during the year or work in a state different from where you live, you may owe tax to multiple states. Your tax software or a tax professional can help you sort out which states you owe tax to.
Interest in tax-advantaged accounts works differently
Interest earned inside certain retirement and education accounts is not taxable in the year you earn it. A Roth IRA grows tax-free, meaning interest and investment gains never trigger a tax bill as long as you follow the withdrawal rules. A traditional IRA grows tax-deferred, meaning you do not pay tax on the interest until you withdraw the money in retirement.
529 college savings plans also grow tax-free if you use the money for may have access to education expenses. Health Savings Accounts (HSAs) grow tax-free if you use withdrawals for medical expenses. These accounts are designed to let your money compound without being eaten away by annual tax bills.
A regular savings account at a bank is not tax-advantaged — it is just a place to store money and earn interest. If you want to avoid taxes on interest, you would need to move money into one of these special accounts, though each has its own rules about who can open one and how much you can contribute each year.
What to do if you did not receive a 1099-INT
If you earned interest but did not receive a Form 1099-INT by early February, contact your bank and ask them to send it or provide the interest amount. You can also log into your online banking account and find the interest paid in your account statements or year-end summary.
Do not skip reporting interest just because you did not receive the form. The IRS has a copy of the form the bank sent them, and if your tax return does not match, you will hear about it. Report the interest based on your account statements, and keep those statements in case the IRS asks questions later.
If your bank made an error on the 1099-INT — for example, if it shows interest you did not actually earn — contact the bank and ask for a corrected form. The bank will send you a corrected 1099-INT and file a corrected version with the IRS.
Frequently Asked Questions
Do I have to report interest if I only earned a few dollars?
Yes. Even if you earned $5 in interest, it is taxable income and you should report it on your tax return. The bank may not send you a 1099-INT if you earned less than $10, but you still owe tax on it. Check your account statements for the exact amount.
Can I deduct savings account interest as a loss?
No. Interest income is taxable, but you cannot deduct it as a loss. You report it as income, and you owe tax on it. The only way to reduce the tax is to earn less interest (by keeping less money in the account) or to move money into a tax-advantaged account like a Roth IRA.
What if I earned interest in multiple accounts at the same bank?
The bank will typically combine all interest from all your accounts at that bank into one 1099-INT. If you have accounts at different banks, each bank sends a separate form. Report all of them on your tax return.
Does interest earned in a joint savings account get split between owners for tax purposes?
The bank reports all interest on one 1099-INT, usually in the name of the first account owner. You and the other owner need to decide how to split the interest for tax purposes — typically 50/50 if you own it equally. Each person reports their share on their own tax return. Keep records of how you split it in case the IRS asks.
What if my interest income pushes me over the limit for a tax deduction or credit?
Interest income counts as regular income, so it can affect your may be able to access for certain deductions and credits. For example, if you are close to the income limit for the Earned Income Tax Credit or a student loan interest deduction, extra interest income might push you over the limit and reduce or eliminate the benefit. Run the numbers with your tax software to see the full impact.