Yes, you owe federal income tax on all savings account interest, no matter how small
The IRS treats savings account interest as ordinary income. If your bank paid you interest during the year, that money is taxable at your regular income tax rate — the same rate you pay on wages or salary. There is no threshold below which interest becomes tax-free, and there is no special low rate for interest income. A savings account earning $5 in interest is taxable the same way as one earning $500.
Your bank will report the interest to the IRS on a Form 1099-INT if you earned $10 or more in interest during the tax year. Even if you earned less than $10 and receive no form, you still owe tax on that interest — you are responsible for reporting it whether or not the bank sends paperwork. Many people miss small amounts of interest income because they assume no form means no tax obligation. That assumption is wrong.
State and local income taxes also apply to savings interest in most states. A few states — including Florida, Texas, and Wyoming — do not tax income at all, so residents there owe only federal tax. Most other states tax interest at their regular income tax rate, which varies by state and sometimes by county.
Key Takeaways
- All savings account interest is taxable federal income, regardless of the amount, and you owe tax on it even if your bank does not send you a Form 1099-INT.
- Your bank reports interest of $10 or more on Form 1099-INT, which it sends to you and the IRS by January 31 of the following year.
- You report the interest on your tax return in the income section, and it is taxed at your ordinary income tax rate, not a special rate.
- Most states tax savings interest as ordinary income, but a handful of states do not tax income at all.
- High-yield savings accounts and money market accounts produce more interest, which means a larger tax bill — factor this into your decision when comparing account types.
When your bank sends Form 1099-INT and what it means
Your bank is required to send you a Form 1099-INT by January 31 if you earned $10 or more in interest during the previous calendar year. The form shows the total interest paid to you and goes to both you and the IRS. This is the document you use to report the interest on your tax return.
If you earned less than $10, your bank will not send a form, but you still owe tax on the interest. You report it yourself on your return under the income section. The IRS does not always catch unreported small amounts, but that does not make it legal to skip it — and if you are audited, the bank's records will show what you earned.
If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. Add all the interest together when you report it on your return. Some people mistakenly think they can report only the forms they receive and ignore accounts that did not send one; the IRS expects you to report all interest income from all sources.
How to report savings interest on your tax return
Interest income goes on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in total interest and dividends for the year. If you have $1,500 or less, you can report it directly on Form 1040 without filing Schedule B. Either way, the interest is added to your other income and taxed at your ordinary rate.
When you file, you will enter the total interest from all your savings accounts in one line. If you received a 1099-INT, use the amount shown on the form. If you did not receive a form but earned interest, use your bank statements to calculate the total. Keep copies of your 1099-INT forms and bank statements with your tax records for at least three years in case the IRS asks questions.
If you file electronically using tax software, the software will walk you through entering interest income and place it in the correct location on your return automatically. If you file by hand, refer to the instructions that come with Schedule B or Form 1040 to find the right line.
The difference between federal and state tax on interest
Federal income tax applies to all U.S. residents and is calculated the same way everywhere. State income tax varies by where you live. 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 one of these states, you owe only federal tax on your savings interest.
In all other states, you owe state income tax on savings interest at your state's ordinary income tax rate. Some states tax interest at a flat rate regardless of your income level; others use a graduated system where the rate depends on your total income. A few states offer small deductions or credits for interest income, but these are rare and usually apply only to residents over a certain age or with low incomes.
If you live in a state with income tax and moved during the year, you may owe tax to two states. You will report interest income to both your old state (for the months you lived there) and your new state (for the months you lived there). Your new state will usually give you a credit for taxes paid to your old state to avoid double taxation, but you have to claim it on your new state return.
How high-yield savings accounts change your tax picture
High-yield savings accounts and money market accounts pay significantly more interest than traditional savings accounts — sometimes 4% to 5% annually compared to 0.01% at a brick-and-mortar bank. This higher interest is attractive, but it also means a larger tax bill. A $10,000 deposit earning 4.5% produces $450 in taxable interest per year; the same deposit at 0.01% produces $1 in taxable interest.
The tax on that extra interest depends on your income tax bracket. If you are in the 22% federal bracket, the $450 in interest costs you about $99 in federal tax (plus state tax if applicable). This is not a reason to avoid high-yield accounts — the after-tax return is still better than a traditional account — but it is a reason to factor taxes into your comparison when choosing where to keep your money.
Some people move money between account types to manage their tax bill, but this does not reduce the tax owed. The IRS taxes interest based on when it is earned, not when you move the money. If you earn $100 in interest in January and move the account in February, you still owe tax on the full $100 for that year.
What to do if you did not receive a 1099-INT but earned interest
If you earned interest but your bank did not send a 1099-INT, it usually means you earned less than $10 for the year. You are still required to report this interest on your tax return. Look at your monthly bank statements, add up all the interest deposits, and report the total on Schedule B or Form 1040, depending on your total interest and dividend income for the year.
Keep your bank statements as proof in case you are audited. The IRS can see what your bank paid you through its own records, even if no form was issued to you. Reporting small amounts of interest shows the IRS that you are being thorough and honest, which can work in your favor if questions arise.
If you have accounts at multiple banks and some sent 1099-INT forms while others did not, add the reported amounts and the unreported amounts together. Do not report only the forms you received — that is incomplete reporting and can trigger an audit notice.
Joint accounts and interest reporting
If you own a savings account jointly with another person, the bank will usually issue a single 1099-INT to the account owner listed first on the account. Both owners are responsible for reporting their share of the interest, but only one form is issued. You and the other owner need to decide how to split the interest for tax purposes — usually 50/50 if you contributed equally, or based on the percentage each of you contributed.
The person who receives the 1099-INT should report their share on their tax return. The other owner should report their share using their bank statements as documentation, even though they did not receive a form. Both of you will have the same interest income showing on your bank records, so the IRS can verify that you each reported your portion correctly.
If you are married and file jointly, this is simpler — you report all household interest income together on one return, and it does not matter which spouse received the form. If you file separately, each spouse reports only their own share, and you should keep documentation showing how you divided the interest.
Frequently Asked Questions
Can I deduct the taxes I pay on savings interest?
No. Interest income is taxable, but you cannot deduct the tax you pay on it. You can deduct investment expenses in some cases (like fees paid to a financial advisor), but not the income tax itself. The tax is simply part of the cost of earning that interest.
What if I earned interest in a CD or money market account instead of a savings account?
CDs, money market accounts, and all other deposit accounts work the same way for tax purposes. The bank reports interest of $10 or more on Form 1099-INT, and you report it as ordinary income on your tax return. The type of account does not matter — only the interest earned.
Do I have to pay taxes on interest if I am a minor or a dependent?
Yes. A minor or dependent owes tax on savings interest just like anyone else. If the interest is small enough, the dependent may not have to file a return (the threshold depends on their age and income type), but if they do file, they must report all interest earned. A parent cannot claim the interest as their own income.
What happens if I do not report savings interest on my tax return?
The IRS receives a copy of your 1099-INT and will notice if you do not report it. Unreported income can trigger an audit notice, penalties, and interest charges on the unpaid tax. Even small amounts add up over time, and the IRS has records going back years. It is easier and cheaper to report the interest when you file.
Does interest earned in a retirement account like an IRA count as taxable income?
No. Interest earned inside a traditional IRA, Roth IRA, or other may have access to retirement account is not taxable in the year it is earned. You do not receive a 1099-INT for retirement account interest, and you do not report it on your tax return. Tax on retirement account withdrawals is handled differently and depends on the account type.