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 ordinary 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 whatever rate bracket you fall into. There is no threshold below which interest becomes tax-free, though your bank will only send you a form if the interest exceeds $10 in a calendar year.
State income tax works the same way in most places. If your state has an income tax, interest income is taxable there too. A handful of states — including Tennessee, Texas, and Wyoming — do not tax interest at all, but that is rare.
The amount of tax you owe depends on your total income for the year and your filing status, not on the size of the interest payment itself. Someone in the 22% federal bracket pays more tax on $100 of interest than someone in the 10% bracket, even though the interest is identical.
Key Takeaways
- Banks report interest over $10 to the IRS on Form 1099-INT, and you must report it on your tax return whether or not you receive a form.
- Interest income is taxed at your ordinary income tax rate, which depends on your total income and filing status, not on the interest amount alone.
- Most states tax savings account interest the same way the federal government does, though a few states do not tax interest at all.
- You report interest on Schedule 1 (Form 1040) or on your state return, depending on which tax forms you file.
How banks report interest to the IRS
Your bank sends you a Form 1099-INT if you earned $10 or more in interest during the calendar year. The form arrives by January 31 and shows the total interest paid into each account you held at that bank. The IRS receives a copy at the same time.
If you earned less than $10, your bank does not send a form, but you still owe tax on the interest. You find the amount by checking your year-end account statement or logging into your online banking portal — most banks show interest earned in a summary section or in the transaction history.
If you had accounts at multiple banks, you will receive a separate 1099-INT from each one. Add all the interest together when you report it on your return.
Where to report interest on your tax return
On your federal return, you report interest income on Schedule 1 (Form 1040), line 8. If you file the short form (1040-SR or 1040-EZ, if available in your state), the interest goes directly on the main form. The IRS matches what you report against the 1099-INT forms your banks sent, so the amount must match or you risk a notice.
For state taxes, the process varies. Most states have a line on their income tax return for interest and dividend income combined. Some ask you to attach a copy of your federal Schedule 1. A few states do not require you to report interest separately if it is under a certain amount — check your state's tax instructions or contact your state revenue department.
If you file jointly with a spouse, both of you may have interest-bearing accounts. Report each person's interest separately on the return, even if you file together.
Tax rates on interest income
Interest is taxed as ordinary income, not at a special lower rate like long-term capital gains. This means it is taxed at the same rate as your wages, salary, or other income. If you are in the 12% federal tax bracket, interest is taxed at 12%. If you are in the 24% bracket, interest is taxed at 24%.
Your tax bracket depends on your total income for the year — not just the interest, but all income combined. Someone with $50,000 in wages and $500 in interest pays tax on $50,500 total. The interest pushes some or all of that $500 into a higher bracket if you are near the edge of a bracket boundary.
State tax rates on interest vary widely. Some states tax interest at the same rate as federal income tax; others use a flat rate regardless of your income level. A few states, like Alaska and Florida, do not tax interest at all.
When interest is not taxable
Interest on certain types of accounts and bonds is exempt from federal tax, though these are uncommon for everyday savings. Municipal bonds (bonds issued by cities and states) produce interest that is usually exempt from federal tax and sometimes from state tax too. Interest on U.S. savings bonds (Series EE and Series I) can be deferred until you cash them in, and if you use the proceeds for education, the interest may be exempt.
Regular savings accounts, money market accounts, and certificates of deposit (CDs) do not may have access to for any of these exemptions. Interest on all of them is fully taxable.
If you are a minor and your parents claim you as a dependent, your interest income still counts toward your own tax return. Your parents cannot claim the interest as their own income.
What to do if you did not receive a 1099-INT
If you earned $10 or more in interest and your bank did not send a 1099-INT by February 15, contact the bank directly. Ask for a corrected form or a statement showing the interest paid. Keep a record of your request.
If the bank cannot locate the form, use your account statement as proof of the interest amount. Report the interest on your return anyway — the IRS expects you to report all income whether or not you have a form. If the IRS later receives a 1099-INT that does not match your return, you will receive a notice, but you can respond with your bank statement to show you reported it correctly.
Do not skip reporting interest because you did not receive a form. The IRS has a copy of every 1099-INT sent to you, and mismatches trigger automated notices.
Interest from joint accounts and trusts
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 on a 1099-INT to the account owner listed first, or to both owners if the account is set up that way. You and the other owner must sort out who reports what on their individual returns — the IRS does not split it automatically.
If you are a trustee or beneficiary of a trust with interest-bearing accounts, the interest may be taxable to the trust, to you, or split between you depending on the trust's structure and how much income the trust distributes to you. This is complex; consult a tax professional or the trust document.
Frequently Asked Questions
Do I have to pay tax on interest if I only earned a few dollars?
Yes. There is no minimum amount of interest that is tax-free. Even $1 of interest is taxable income. Your bank only sends a 1099-INT if you earned $10 or more, but you still owe tax on smaller amounts and must report them on your return.
What if my interest income pushes me into a higher tax bracket?
Interest is added to your other income for the year, and your total income determines your tax bracket. If interest pushes you over a bracket threshold, only the income above that threshold is taxed at the higher rate. The IRS calculates this automatically when you file.
Can I deduct interest I paid on a loan from my savings account interest?
No. Interest you earn is income; interest you pay on most loans is not deductible. The only common exception is mortgage interest on a primary or secondary home, which you can deduct if you itemize deductions.
Do high-yield savings accounts have different tax rules than regular savings accounts?
No. Interest from a high-yield savings account is taxed exactly the same way as interest from a regular savings account. The higher rate means more interest, which means more tax, but the rules are identical.
What if I moved my money between banks mid-year and received two 1099-INT forms?
Add the interest from both forms together and report the total on your tax return. The IRS receives both forms and expects you to report the combined amount. Make sure the total on your return matches the sum of all 1099-INT forms you received.