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 earnings. Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year, and you report that amount on your tax return. You cannot avoid this tax by not reporting it — the IRS receives a copy of the form too.

The tax rate you pay depends on your overall income and tax bracket, not on the interest amount itself. If you earned $500 in savings interest and you are in the 22% tax bracket, you do not automatically owe $110. Instead, that $500 gets added to your other income, and you pay tax on the combined total at your marginal rate. For many people, especially those with modest savings, the actual tax owed is small or zero if their total income falls below the standard deduction.

State income tax works the same way in most states. If your state has an income tax, it taxes savings interest at the same rate as federal income. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all, so residents there owe only federal tax on interest. New Hampshire and Tennessee tax only interest and dividend income, not wages.

Key Takeaways

  • You must report all savings account interest on your federal tax return, even if the amount is small.
  • Your bank sends Form 1099-INT to you and the IRS when interest exceeds $10 in a calendar year.
  • The tax you owe depends on your total income and tax bracket, not just the interest amount.
  • Most states tax savings interest the same way the federal government does, but eight states have no income tax.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw the money, but interest in a regular savings account is taxed every year.

When the IRS requires your bank to report interest income

Banks must file Form 1099-INT with the IRS for any account holder who earned $10 or more in interest during a calendar year. You will receive a copy in the mail or electronically, usually by January 31. The form shows the account number (partially masked for security), the interest amount, and sometimes other details like U.S. savings bond interest or early withdrawal penalties.

If you earned less than $10, your bank may not send a 1099-INT, but you still owe tax on that interest. The $10 threshold is only the reporting requirement, not a tax exemption. You are responsible for reporting all interest, regardless of whether you receive a form.

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 move money between accounts or close an account mid-year, the interest is still taxable for the months the money was on deposit.

How interest income affects your tax bracket and overall tax bill

Savings interest is ordinary income, which means it is taxed at the same rates as your salary or wages. The federal tax brackets for 2024 range from 10% to 37%, depending on your total income and filing status. If you earn $500 in interest and you are single with $50,000 in wages, your combined income is $50,500, and you pay tax on the full amount at your applicable bracket rate.

For many people, especially retirees or those with lower incomes, the interest may not increase their tax bill at all. If you are single and your total income (wages plus interest) falls below $14,600 in 2024, you owe no federal income tax because that is the standard deduction. The interest simply fills in part of that deduction space.

However, if you are already above the standard deduction, the interest is taxed at your marginal rate — the rate that applies to your last dollar of income. If you are in the 22% bracket, each additional dollar of interest costs you about $0.22 in federal tax. State tax, if applicable, adds to that amount.

Savings accounts versus retirement accounts and tax-advantaged alternatives

Interest earned in a traditional IRA or 401(k) is not taxed in the year it is earned. The interest compounds tax-free until you withdraw the money in retirement, at which point you pay income tax on the full withdrawal amount. This tax deferral is one of the main reasons these accounts are valuable for long-term saving.

A Roth IRA works differently: you pay tax on the money before you deposit it, but the interest and all future growth are tax-free forever, even in retirement. If you have earned income and your income is below the Roth contribution limits, a Roth IRA can be a better choice than a regular savings account for interest-bearing money you do not need for several years.

High-yield savings accounts (HYSA) and money market accounts earn more interest than traditional savings accounts, but the interest is still taxable in the year it is earned. The higher rate means a larger 1099-INT and a larger tax bill, but the after-tax return is usually still better than a low-yield account. Some people use a HYSA for an emergency fund and a Roth IRA for longer-term savings to balance accessibility with tax efficiency.

State income tax on savings interest

If you live in a state with an income tax, that state taxes your savings interest at its own rate. Most states use a progressive bracket system similar to the federal system, with rates ranging from about 1% to 13% depending on the state and your income level. You report the same interest amount on your state return as you do on your federal return.

The eight states with no income tax — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax savings interest at all. If you live in one of these states, you owe only federal tax. New Hampshire and Tennessee are exceptions: they have no income tax on wages, but they do tax interest and dividend income, so you would still owe state tax on savings interest there.

Some states offer tax breaks for certain types of savings. For example, a few states exempt interest earned on bonds issued by that state, or they offer deductions for retirement account contributions. Check your state's tax website or a tax professional to see whether any special rules apply to your situation.

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 (because the amount was under $10, or because of an error), you still must report it. Look at your account statements from the previous year and add up all the interest deposits. Report that total on your tax return in the interest income section, even if you have no form to attach.

If you believe your bank made an error — for example, if the 1099-INT shows the wrong amount or the wrong account holder — contact the bank and ask for a corrected form. The bank can issue a corrected 1099-INT (marked as such) and file it with the IRS. You should also file an amended return if the error affects your tax bill.

Keep your bank statements and 1099-INT forms for at least three years in case the IRS asks questions. If you cannot locate a 1099-INT, your bank can usually provide a duplicate or a transcript showing the interest earned.

How to report savings interest on your tax return

On the federal return, savings interest goes on Schedule 1 (Form 1040), line 8, under "Interest." If you use tax software, you enter the 1099-INT information when prompted, and the software places it in the correct location. If you file by hand, you add up all interest from all 1099-INT forms and enter the total on line 8.

If you earned more than $1,500 in interest from multiple sources, you may need to complete Schedule B (Interest and Ordinary Dividends) instead, which requires you to list each source separately. Tax software handles this automatically; if you file by hand, the instructions on the form tell you when Schedule B is required.

On your state return, you report interest income in a similar way, usually on a line labeled "Interest Income" or "Other Income." The state form instructions specify where to enter the amount. If you live in a state with no income tax, you do not file a state return for income tax purposes.

Frequently Asked Questions

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

Yes. The $10 threshold is only when banks must send a 1099-INT form. You are responsible for reporting all interest income, no matter how small. If you earned $3 in interest, you report it on your return.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount on your return. Savings account fees are not deductible. However, if your bank charged you a fee and also paid you interest, the interest is still taxable at the full amount.

What if I moved money between banks mid-year and earned interest at both?

Each bank reports the interest it paid you on its own 1099-INT. You add up all the forms and report the total interest on your return. The timing of the transfer does not matter — only the interest actually earned and paid to you.

Is interest in a joint savings account taxed differently?

The bank reports the full interest amount on a 1099-INT, but you and the joint owner must decide how to split it for tax purposes. Usually, you split it based on who owns what percentage of the account. Both owners report their share on their own tax returns. Consult a tax professional if the ownership split is unclear.

Do I owe tax on interest I did not withdraw?

Yes. You owe tax on interest in the year it is credited to your account, even if you leave it there and do not withdraw it. The interest compounds and earns more interest, but you pay tax on the original interest in the year it was earned.