Yes, you owe federal income tax on savings account interest
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 salary — you report it on your tax return and pay income tax on it at your ordinary rate. There is no exemption for savings interest, no matter how small the amount.
Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. You use this form to report the interest on your federal tax return. If you earned less than $10, your bank may not send a form, but you still owe tax on that interest and should report it.
State income tax works the same way in most states — you owe tax on savings interest at your state rate as well. A few states do not have income tax at all, so residents of those states owe only federal tax. Some states exempt interest income for people over a certain age, but this is rare and varies by state.
Key Takeaways
- All savings account interest is taxable income at both the federal and state level, with no minimum amount threshold.
- Your bank sends Form 1099-INT when you earn $10 or more in interest, and you report this amount on your tax return.
- You pay tax on savings interest at your ordinary income tax rate, which depends on your total income and filing status.
- High-yield savings accounts earn more interest but also create a larger tax bill, so factor this into your planning.
How the IRS knows about your savings interest
Banks report interest payments to the IRS automatically through Form 1099-INT. Your bank keeps a copy for its records, sends one to you, and sends one to the IRS. The IRS then matches what you report on your tax return against what the bank reported.
If you do not report the interest on your return and the IRS sees the 1099-INT, you will receive a notice asking why the amounts do not match. This can trigger an audit or a bill for unpaid tax plus penalties and interest. Even small amounts add up over time if left unreported.
You should receive your 1099-INT by January 31 each year. If you do not get one by early February, contact your bank and ask them to send it or provide the interest amount so you can report it yourself.
What tax rate applies to your savings interest
You pay tax on savings interest at your marginal tax rate — the same rate that applies to your last dollar of income. If you earn $50,000 a year and file as single, your marginal rate is 22 percent. If you earn $150,000, it is 24 percent. The interest itself does not push you into a higher bracket unless your total income crosses a bracket boundary.
This means a person earning $30,000 a year who receives $100 in savings interest pays roughly $12 in federal tax on that interest (at the 12 percent rate). A person earning $200,000 who receives the same $100 pays roughly $24 (at the 24 percent rate). The amount of interest is the same, but the tax bill differs based on income.
State tax rates vary. Some states tax interest at the same rate as federal tax, others use a flat rate, and a few do not tax it at all. Check your state's tax website or ask a tax preparer what rate applies to you.
High-yield savings accounts and the tax trade-off
High-yield savings accounts pay 4 to 5 percent interest, compared to 0.01 percent at many traditional banks. This means more money in your account — but also a larger tax bill. A $10,000 balance in a high-yield account earning 4.5 percent generates $450 in interest per year. At a 22 percent federal tax rate, you owe roughly $99 in federal tax on that interest alone.
This is not a reason to avoid high-yield accounts. The after-tax return is still higher than a traditional savings account. But you should know the tax cost when you plan your savings. If you are saving for a specific goal and need to know how much you will actually have, subtract the estimated tax from the interest you expect to earn.
Some people move money into high-yield accounts in December and then move it back in January to manage the timing of when interest is credited and taxed. This strategy rarely saves money because interest accrues daily, and the tax is owed in the year the interest is credited to your account, not when you move the money.
Reporting savings interest on your tax return
On your federal return, you report savings interest on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest and dividends combined. If you have less than that, you can report the interest directly on Form 1040, line 2b. Either way, the interest flows into your total income and is taxed at your marginal rate.
When you file, you will need the amount from your 1099-INT. If you have multiple savings accounts, you may receive multiple 1099-INT forms — add them all together and report the total. If you lost a 1099-INT or did not receive one, contact your bank for a duplicate or ask them to provide the interest amount in writing.
If you use tax software, it usually walks you through entering the interest amount and places it in the correct spot on your return. If you file by hand or work with a tax preparer, bring all your 1099-INT forms with you.
Interest earned in joint accounts and for minors
If you have a joint savings account with another person, the bank may split the interest between you on separate 1099-INT forms, or it may report all of it to one person. Check your forms carefully. If all the interest was reported to one person but you both own the account, you may need to split the income on your individual returns. This requires coordination with the other account holder and sometimes a letter to the IRS explaining the split.
Interest earned in a child's savings account is taxable to the child, not the parent. The child must report it on their own tax return if they file one. However, if the child's total income is below the standard deduction for their filing status, they may not owe tax even though they must report the interest. A parent can sometimes claim a child as a dependent and use the child's standard deduction to shelter the interest from tax, but the rules are complex and depend on the child's age and income.
What to do if you did not receive a 1099-INT
If you earned interest but did not receive a 1099-INT, contact your bank first. Ask whether the interest was below $10 (the reporting threshold) or whether the form was mailed to an old address. If the bank confirms you earned interest, ask them to provide the amount in writing or send a corrected 1099-INT.
If you cannot get the information from your bank, you can still report the interest on your tax return based on your own records — a statement from the bank, a screenshot, or a note you kept. The IRS will not penalize you for reporting interest that the bank failed to report, as long as you report it yourself.
If the IRS sends you a notice about unreported interest, respond promptly with documentation showing you did report it or explaining why you did not receive a 1099-INT. Ignoring the notice will result in a bill for unpaid tax plus penalties.
Frequently Asked Questions
Do I have to report savings interest if it is under $10?
Yes. The $10 threshold is only for when banks must send you a 1099-INT form. You still owe tax on any interest you earn, no matter how small. Report it on your return based on your bank statements or records.
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 for most people. You pay tax on the interest and absorb the fees separately.
What if I moved money between accounts during the year and earned interest in multiple places?
Add up all the interest from all your accounts. If you received multiple 1099-INT forms, add the amounts together and report the total on your tax return. The IRS will see all the forms, so make sure your return matches the total they receive.
Does interest from a money market account get taxed the same way as savings account interest?
Yes. Money market accounts, certificates of deposit (CDs), and other savings products all generate taxable interest reported on Form 1099-INT. The tax treatment is identical to a regular savings account.
What if my savings interest pushes me into a higher tax bracket?
Interest is added to your other income to calculate your tax bracket, but it does not automatically push you into a higher bracket unless your total income crosses a bracket boundary. Even then, only the income above the boundary is taxed at the higher rate. Most people's savings interest is too small to cause a bracket change.