Yes, you owe federal income tax on savings account interest, and most states tax it too
The interest your bank pays you on a savings account counts as taxable income. The IRS treats it the same way it treats wages or investment dividends — you report it on your tax return, and you owe tax on the full amount at your ordinary income tax rate. There is no threshold below which interest becomes tax-free, though your bank may not report very small amounts.
Your bank sends you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. That form goes to the IRS as well, so they already know about the interest before you file. If you do not report it and the IRS finds the discrepancy, you will owe back taxes plus penalties and interest.
State income tax works the same way in most states — interest is taxable income. A few states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) do not tax income at all, so residents of those states owe federal tax but not state tax on interest. New Hampshire and Tennessee tax only interest and dividends, not wages.
Key Takeaways
- All savings account interest is taxable income at the federal level, regardless of the amount.
- Your bank reports interest of $10 or more on Form 1099-INT, which the IRS receives automatically.
- Most states tax savings interest as ordinary income, but eight states have no income tax at all.
- You report interest on your tax return even if your bank does not send you a 1099-INT form.
- High-yield savings accounts earn more interest but create a larger tax bill in the same year.
How banks report interest to the IRS
Your bank tracks interest paid to you throughout the year and issues a Form 1099-INT by January 31. The form shows the total interest earned in box 1. Your bank keeps a copy for its records, sends one to you, and sends one directly to the IRS.
If you earned less than $10 in interest, your bank may not send you a 1099-INT, but you still owe tax on that interest. The IRS does not require reporting below $10, but that does not make the income tax-free. If you received no 1099-INT but earned interest, you still report it on your return — the IRS will not know about it unless they audit, but you are still legally required to report it.
If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add up all the interest from all the forms and report the total on your tax return. If you moved money between banks during the year, make sure you are not double-counting interest from the same account.
What tax rate applies to your interest income
Savings account interest is taxed as ordinary income, meaning it is taxed at the same rate as your wages or salary. If you are in the 22% federal tax bracket, you pay 22% on your interest. If you are in the 12% bracket, you pay 12%. The rate depends on your total income for the year, not on the interest alone.
This is different from long-term capital gains or may have access to dividends, which often get preferential tax rates. Interest from savings accounts gets no special treatment — it is treated like regular income from the moment it hits your account.
State tax rates vary. Some states use a flat rate (Illinois, Indiana, Massachusetts, Michigan, North Carolina, and Pennsylvania all use rates between 3% and 5.75%). Others use brackets like the federal system, where your rate depends on your income level. Check your state's tax authority website to find your state's rate.
When high-yield savings accounts create a bigger tax bill
High-yield savings accounts pay significantly more interest than traditional savings accounts — sometimes 4% to 5% annually compared to 0.01% at a regular bank. That higher interest means more taxable income in the same year. A $10,000 deposit earning 4.5% generates $450 in taxable interest; the same deposit at 0.01% generates $1.
The tax bill on that extra $449 depends on your tax bracket. In the 22% bracket, you owe about $99 in federal tax on the higher interest. In the 12% bracket, you owe about $54. Add state tax and the total can be $120 to $150 on that same $10,000 deposit.
This does not mean high-yield accounts are a bad choice — you still come out ahead because the interest you keep after taxes is more than you would earn elsewhere. But it does mean you should expect a larger tax bill in the year you move money into a high-yield account, and you should set aside money for taxes rather than spending all the interest.
How to report interest on your tax return
If you file Form 1040 (the standard federal income tax form), you report interest income on Schedule 1, line 8. If you use tax software, it usually asks you to enter the total interest from all your 1099-INT forms, and the software fills in the right line automatically.
Match the amount on your 1099-INT to what you report. If the amounts do not match — for example, if you earned interest in December that did not post until January — keep records showing why. The IRS compares what you report to what your bank reported, and a mismatch triggers a notice.
If you received a 1099-INT but the amount is wrong (the bank made an error), contact the bank and ask for a corrected form. The bank will issue a corrected 1099-INT marked "CORRECTED" and send it to both you and the IRS. Do not report the wrong amount — wait for the corrected form.
Interest from joint accounts and accounts held by minors
If you own a savings account jointly with another person, the interest belongs to whoever owns the account, not necessarily split 50-50. The bank reports the full interest amount to the IRS under the Social Security number of the account owner listed first on the account. If both owners should report half, you need to file a Form 8949 or attach a statement to your return explaining the split.
If a parent opens a savings account for a minor child, the interest is the child's income, not the parent's. The child must report it on their own tax return (or the parent can claim the child as a dependent and report it on the parent's return under certain rules). A child with interest income below the standard deduction may owe no federal tax, but they still need to file if they have earned income or if their parents claim them as dependents.
What to do if you earned interest but received no 1099-INT
If you earned $10 or more in interest and your bank did not send you a 1099-INT by February 15, contact the bank and ask for it. Banks are required to send the form by January 31, so a missing form after mid-February is late. The bank can reissue it or explain why it was not sent.
If the bank says you earned less than $10 and did not send a form, you still report the interest on your return. Write the amount on Schedule 1, line 8, and keep your bank statements as proof in case the IRS asks.
If you earned interest at a bank that has since closed or merged, contact the successor bank or the FDIC (if the bank failed). They can provide copies of old 1099-INT forms or confirm the interest amount from their records.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. Banks do not have to send a 1099-INT for amounts under $10, but you still owe tax on the interest. Report it on your return even if you received no form. The IRS may not know about it unless they audit, but you are legally required to report all income.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. Savings account fees are not deductible. However, if your bank charged you a fee that reduced your interest, the interest amount on your 1099-INT already reflects that reduction, so you report only what you actually received.
What if I moved money between banks mid-year and earned interest at both?
Report all interest from all banks. Each bank sends its own 1099-INT showing only the interest it paid. Add them all together on your tax return. Make sure you are not counting the same money twice if you transferred it from one bank to another.
Is interest from a money market account taxed the same way as savings account interest?
Yes. Money market accounts, certificates of deposit (CDs), and other deposit accounts all generate interest that is taxed as ordinary income. Your bank reports it on Form 1099-INT the same way it reports savings account interest.
Do I owe taxes on interest if I am retired and do not work?
Yes. Interest is taxable income regardless of whether you have other income. If your interest plus other income exceeds the standard deduction for your age and filing status, you owe federal tax. Even if you owe no tax, you may need to file a return to claim a refund of taxes withheld.