You pay taxes on interest your savings account earns, not on the principal balance itself

The money you deposit into a savings account is yours and not taxable. But the interest the bank pays you on that money is income, and the IRS treats it like any other income you receive. If your savings account earned interest during the year, you will owe federal income tax on that interest at your ordinary income tax rate. Some states also tax savings interest, depending on where you live.

The amount of tax you owe depends on how much interest you earned and your tax bracket. If you earned $50 in interest and you are in the 22% tax bracket, you would owe roughly $11 in federal tax on that interest alone. The bank reports what you earned to both you and the IRS on a Form 1099-INT, which arrives by January 31 each year.

Key Takeaways

  • You owe federal income tax on all interest your savings account earns, reported to the IRS on Form 1099-INT.
  • The bank sends you a 1099-INT by January 31 if you earned $10 or more in interest during the year.
  • Some states tax savings interest, while others do not — check your state's tax rules to know what you owe.
  • You must report all interest income on your federal tax return, even if the bank does not send you a 1099-INT.

How the IRS knows about your savings interest

Banks are required to report interest payments to the IRS. When your savings account earns interest, the bank tracks it and sends you a Form 1099-INT showing the total amount. The bank sends a copy to you and a copy to the IRS. If you earned $10 or more in interest during the calendar year, the bank must send you the form by January 31.

If you earned less than $10, the bank may not send you a 1099-INT, but you still owe tax on that interest. You are required to report all interest income on your tax return, whether or not you receive a form. The IRS cross-checks what banks report against what people claim on their returns, so underreporting interest is a common audit trigger.

What tax rate applies to your savings interest

Savings interest is taxed as ordinary income, which means it is taxed at your regular income tax rate. Your income tax rate depends on your total income for the year and your filing status. If you are single and earned $45,000 in wages plus $500 in savings interest, that $500 is taxed at whatever bracket your total income of $45,500 puts you in.

For 2024, federal tax brackets range from 10% to 37%. Most people in the middle brackets pay 12%, 22%, or 24%. The higher your total income, the higher the tax rate on your interest. This is different from long-term capital gains, which have their own lower tax rates — savings interest does not get that break.

State taxes on savings interest

Whether you owe state income tax on savings interest depends on your state. Most states that have an income tax tax savings interest the same way the federal government does. A few states exempt interest income from state tax entirely. New Hampshire and Tennessee, for example, do not tax interest or dividend income at all. Other states tax it fully.

Check your state's tax department website or ask a tax preparer what your state's rule is. If you live in a state with income tax and earned savings interest, you will usually report it on your state return as well as your federal return. The amount you owe in state tax varies widely — it could be nothing, or it could be 5% to 10% of your interest depending on the state.

Reporting interest on your tax return

When you file your federal tax return, you report all interest income on Schedule B (if you use the long form) or directly on Form 1040 (if you use the short form). You list each account's interest separately if you received multiple 1099-INT forms, or you can combine them if they are all from the same bank. The total goes on your return as part of your income.

If you use tax software, it usually walks you through entering the 1099-INT information. If you use a tax preparer, bring all your 1099-INT forms with you. Make sure the name and Social Security number on the 1099-INT match what is on your tax return — mismatches can delay your refund or trigger an audit notice.

High-yield savings accounts and interest taxes

High-yield savings accounts pay significantly more interest than traditional savings accounts — sometimes 4% to 5% annually instead of 0.01%. That higher interest means higher taxes. If you have $10,000 in a high-yield account earning 4.5%, you would earn $450 in interest per year and owe roughly $99 in federal tax (at the 22% bracket), plus state tax if your state taxes interest.

The tax does not change the math on whether a high-yield account is worth it — the after-tax interest is still usually better than what a traditional account pays. But it is worth knowing that the interest you see advertised is the gross amount before taxes. Your actual take-home interest will be lower once you account for what you owe.

What to do if you did not receive a 1099-INT

If you earned $10 or more in interest and did not receive a 1099-INT by early February, contact the bank and ask for it. The bank may have the wrong address on file or may still be processing forms. If the bank confirms it sent the form, check your mail again or ask if it was sent electronically.

If you earned less than $10 and did not receive a form, that is normal — the bank is not required to send one. You still owe tax on that interest, so you will need to report it on your return. If you cannot remember the exact amount, contact the bank and ask for a statement showing interest earned, or log into your online account to find it.

Frequently Asked Questions

Do I owe taxes on money I transfer between my own savings accounts?

No. Moving money from one account to another is not income. You only owe tax on interest the bank pays you, not on the principal you deposit or move around.

What if I opened a savings account late in the year and earned very little interest?

You still owe tax on it, even if it is just a few dollars. Report it on your return. The bank will send you a 1099-INT only if you earned $10 or more, but you are required to report all interest income regardless of the amount.

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

No. You report the full interest amount the bank paid you. Fees are a separate issue and generally cannot be deducted on your personal tax return. Report the interest as shown on your 1099-INT.

Do I owe taxes on interest if I am a minor with a savings account?

Yes. A minor's interest income is taxable and must be reported. If the minor's income is below a certain threshold (which varies by year), they may not owe tax, but the income still has to be reported on a tax return, usually on the parent's return or the minor's own return depending on the situation.

What happens if I report interest income on my return but the 1099-INT shows a different amount?

The IRS will likely send you a notice asking you to explain the difference. Always report the amount shown on the 1099-INT the bank sent you. If you believe the amount is wrong, contact the bank first to correct it before filing your return.