Yes, the interest your savings account earns is taxed as ordinary income

The money you deposit into a savings account is yours and stays yours — that part is not taxed. But the interest the bank pays you on that money counts as income to the IRS, and you owe federal income tax on it. Most states tax it too. The bank will report what you earned to both you and the IRS on a form called a 1099-INT, and you report that same amount on your tax return.

How much tax you actually pay depends on your total income for the year and what tax bracket you fall into. Someone in the 22% tax bracket pays more tax on the same interest than someone in the 10% bracket. The interest itself does not get taxed at a special rate — it is treated like wages or other ordinary income.

The only exception is if your interest is so small that the bank does not have to report it. Banks do not send a 1099-INT for interest under $10 in a calendar year, but you still owe tax on it if you file a return.

Key Takeaways

  • Interest earned in a savings account is taxed as ordinary income at your regular tax rate, not at a special rate.
  • The bank reports your interest on a 1099-INT form, which you receive by January 31 and must report on your tax return.
  • You owe tax on all interest, even if the bank does not send you a 1099-INT because the amount was under $10.
  • High-yield savings accounts earn more interest, which means you owe more tax, but the after-tax return is usually still better than a regular savings account.

When the bank sends you a 1099-INT and what it means

By January 31 of the following year, your bank will mail or email you a 1099-INT if you earned $10 or more in interest during the previous calendar year. This form shows how much interest you earned in box 1. You will receive a copy for your records, and the bank sends a copy to the IRS as well.

The 1099-INT is not a bill — it is just a report of income. You use the number from box 1 to fill in your tax return. If you use tax software, you can usually enter the information directly from the form, and the software will put it in the right place on your return.

If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. Add all the interest amounts together when you report your income.

How much tax you owe on savings interest

The tax you owe is calculated using your marginal tax rate — the tax bracket you fall into based on your total income for the year. If you earn $50,000 in wages and $500 in savings interest, that $500 is taxed at the same rate as your last dollars of wages, not at a lower rate.

For 2024, the federal tax brackets for single filers range from 10% to 37%. If you are in the 22% bracket, you owe roughly 22 cents in federal tax for every dollar of interest. Add your state income tax on top of that — most states tax interest, though a few do not.

The actual amount varies based on your filing status (single, married filing jointly, head of household), whether you have dependents, and what other deductions you claim. A tax professional or tax software can calculate your exact liability once you know your interest amount.

Why high-yield savings accounts still make sense even with taxes

A high-yield savings account might pay 4% to 5% annual interest, while a regular savings account pays 0.01% or less. Yes, you owe tax on that higher interest. But even after taxes, you come out ahead.

If you have $10,000 in a high-yield account earning 4.5% and you are in the 22% federal tax bracket, you earn $450 in interest and owe roughly $99 in federal tax (plus state tax). Your after-tax gain is about $351. In a regular savings account earning 0.01%, you earn $1 and owe almost nothing in tax. The high-yield account wins by a wide margin.

The tax is a cost, but it is a cost on money you would not have earned otherwise. You are still better off earning taxed interest than earning no interest at all.

Reporting interest on your tax return

When you file your federal return, you report your interest income on Schedule 1 (Form 1040), line 8. If you use tax software, the program walks you through entering this information. If you file by hand, you write the total interest from all your 1099-INT forms on that line.

The interest gets added to your other income, and your tax is calculated on the combined total. You do not file the 1099-INT itself with your return — you keep it for your records — but the IRS receives a copy directly from your bank, so they know what you earned.

If you earned less than $10 in interest and did not receive a 1099-INT, you still report it if you file a return. Write the amount on Schedule 1, line 8, and note "other interest" or the name of the account.

State income tax on savings interest

Most states tax interest income the same way the federal government does — as ordinary income at your regular state tax rate. A few states do not tax interest at all, including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

If you live in a state that taxes interest, you report it on your state return as well. Some states use the same 1099-INT information; others have their own forms. Check your state's tax authority website or ask a tax professional if you are unsure whether your state taxes savings interest.

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 vary, so consult a tax professional if this applies to you.

What happens if you do not report interest income

The IRS receives a copy of every 1099-INT your bank sends. If you do not report the interest on your return, the IRS will notice the discrepancy when they match your return against the forms they received from your banks. They will send you a notice asking you to pay the tax you owe, plus penalties and interest on the unpaid amount.

The penalty for not reporting income is usually 20% of the unpaid tax, and interest accrues daily. It is much cheaper to report the interest, even if you owe tax on it, than to ignore it and deal with the IRS later.

If you made an honest mistake and did not report a small amount of interest, you can file an amended return (Form 1040-X) to correct it. The sooner you do this, the lower the penalties and interest will be.

Frequently Asked Questions

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

The bank does not send you a 1099-INT for interest under $10, but you still owe tax on it if you file a return. Report the amount on Schedule 1, line 8 of your federal return. If you do not file a return, you do not have to report it.

Can I deduct savings account fees from my interest income?

No. You report the full interest amount on your tax return. Fees are not deductible against interest income. However, if you have significant investment expenses, you may be able to deduct them in other contexts — ask a tax professional.

What if I moved money between accounts during the year?

Moving money between your own accounts does not change the tax. You report all interest earned in all accounts. The bank reports interest based on the account where it was earned, so you will receive separate 1099-INT forms if you have multiple accounts at different banks.

Is interest taxed differently if it is in a joint account?

The interest is still taxed as ordinary income. If the account is joint and both owners file separate returns, you and the other owner may need to split the interest or agree on who reports it. This is a situation where a tax professional can help you avoid problems with the IRS.

Do I owe tax on interest in a CD or money market account?

Yes. Interest from CDs, money market accounts, and any other savings vehicle is taxed the same way as interest from a regular savings account. The bank will send you a 1099-INT for interest of $10 or more.