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 is taxable income. The IRS treats it the same way it treats wages or salary — you report it on your tax return and pay income tax on it at your regular rate. Your bank will send you a Form 1099-INT each January showing how much interest you earned the previous year, and you use that form to report the amount on your federal return.
State income tax works the same way in most states. If your state has an income tax, you report the same interest income on your state return. A handful of states — including Pennsylvania, Illinois, and Mississippi — do not tax interest income at all, which is one reason some people move their savings there, though you have to live in the state for the exemption to apply.
The amount of tax you pay depends on your total income and your tax bracket. Someone in the 12 percent federal bracket pays 12 cents in federal tax for every dollar of interest earned. Someone in the 37 percent bracket pays 37 cents. State tax rates vary widely, from under 3 percent to over 10 percent depending on where you live.
Key Takeaways
- Your bank reports all savings interest to the IRS on Form 1099-INT, which you receive by January 31 each year.
- You must report this interest on your federal tax return and pay income tax at your regular rate, with no minimum threshold.
- Most states also tax savings interest as ordinary income, though a few states exempt it entirely.
- High-yield savings accounts earn more interest, which means you owe more tax — but the after-tax return is still usually better than a regular savings account.
When your bank sends you Form 1099-INT and what it means
Your bank mails or emails Form 1099-INT by January 31 of the year after you earned the interest. If you earned $10 in interest during 2024, you will receive the form in January 2025. The form shows the total interest paid to you in box 1, and that is the number you report on your tax return.
You will receive a 1099-INT only if you earned $10 or more in interest during the year. If you earned less than $10, the bank does not have to send you a form, but you still owe tax on that interest — you just have to track it yourself or ask the bank for a statement showing the amount.
The IRS receives a copy of every 1099-INT your bank sends you. This means the IRS already knows how much interest you earned before you file your return. If you do not report it, the IRS will catch the discrepancy when it matches your return against the forms it received from banks.
How to report savings interest on your tax return
On your federal return, you report the interest income on Schedule 1 (Form 1040), line 8, under "Interest." If you use tax software, you enter the amount from box 1 of your 1099-INT and the software places it in the correct spot automatically. If you file by hand, you write the total interest from all your 1099-INT forms on that line.
If you have multiple savings accounts at different banks, you add up all the interest from all the 1099-INT forms and report the total as one number. You do not list each account separately on your federal return.
On your state return, the process is similar but varies by state. Most states have a line for interest income on their main return form. Some states use a separate schedule. Your state's tax software or instructions will show you where to report it. If you live in a state with no income tax, you do not report it on a state return at all.
The difference between regular and high-yield savings accounts from a tax perspective
A high-yield savings account earns more interest than a regular savings account — sometimes 4 to 5 percent annually instead of 0.01 percent. That higher interest means you owe more tax. If you earn $500 in interest instead of $5, you report $500 on your return and pay tax on it.
However, even after paying tax on the higher interest, you come out ahead. If you are in the 24 percent federal tax bracket and earn $500 in interest, you owe $120 in federal tax, leaving you $380 after tax. That is far better than earning $5 in a regular account and owing $1.20 in tax, leaving you $3.80. The tax is a cost, but the higher return still wins.
The tax impact is one reason some people keep emergency funds in high-yield savings despite the tax bill — the interest rate is high enough that after-tax returns beat other low-risk options like money market accounts or CDs.
What happens if you do not report savings interest
If you do not report interest income on your return, the IRS will notice when it compares your return to the 1099-INT your bank sent. The IRS will send you a notice proposing to add the unreported interest to your income and assess additional tax, plus interest on the unpaid amount and potentially a penalty for underpayment.
The penalty for not reporting income is typically 20 percent of the unpaid tax, though it can be higher if the IRS determines the omission was intentional. Interest accrues on the unpaid tax from the original due date of your return until you pay.
If the amount is small — a few dollars — the IRS may not pursue it aggressively, but it is still technically a violation. The safest approach is to report all interest income, no matter how small.
States that do not tax savings interest
A small number of states exempt interest income from state income tax. Pennsylvania does not tax interest or dividend income at all. Illinois exempts interest income but taxes dividends. Mississippi exempts interest earned before a certain age or in certain account types. South Carolina and Tennessee have limited exemptions for certain types of interest.
These exemptions apply only if you are a resident of the state. If you live in Pennsylvania but have a savings account in New York, you still owe New York tax on the interest if New York requires it — your state of residence is what matters for state tax purposes.
Even if your state does not tax interest, you still owe federal tax on it. The federal government taxes all interest income regardless of where you live or which state does not tax it.
How to minimize the tax impact of savings interest
You cannot avoid paying tax on savings interest, but you can reduce the amount you owe by earning interest in tax-advantaged accounts. Money in a traditional IRA or 401(k) grows tax-free until you withdraw it in retirement. Money in a Roth IRA or Roth 401(k) grows tax-free and you never pay tax on it if you follow the withdrawal rules.
If you have reached the contribution limits on retirement accounts, you can also consider I Bonds (Series I Savings Bonds), which are issued by the U.S. Treasury. Interest on I Bonds is not taxed at the state level, only at the federal level, and you can defer federal tax until you redeem the bond. This is not a complete tax avoidance strategy, but it reduces your state tax bill.
For most people, the simplest approach is to accept that savings interest is taxable and report it accurately. The tax is usually small compared to the benefit of having an emergency fund earning interest rather than sitting in a checking account earning nothing.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Your bank does not have to send you a 1099-INT if you earned less than $10, but you still owe tax on the interest. You must track it yourself and report it on your return. The IRS has no minimum threshold — all interest income is taxable.
What if I have savings accounts at multiple banks?
You will receive a separate 1099-INT from each bank. Add up all the interest from all the forms and report the total on one line of your tax return. You do not report each account separately.
Can I deduct savings account fees from the interest I report?
No. You report the gross interest your bank paid you, not the net amount after fees. Savings account fees are not deductible on your personal tax return. You report the full amount from box 1 of your 1099-INT.
Do I owe tax on interest if I moved the money before the year ended?
Yes. Tax is based on when the interest was earned and credited to your account, not on how long you held the money. If interest was credited in 2024, you owe tax on it in 2024, even if you withdrew the money in January 2025.
What if my bank made an error on my 1099-INT?
Contact your bank and ask them to issue a corrected form. They will send you a corrected 1099-INT and also send a corrected copy to the IRS. Report the corrected amount on your tax return. If you already filed using the wrong amount, you may need to file an amended return.