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 dividends — you report it on your tax return and pay tax at your ordinary income rate. There is no threshold below which interest becomes tax-free, though your bank may not send you a tax form if the amount is very small.

Your bank will send you a Form 1099-INT if you earned $10 or more in interest during the year. Even if you earn less than $10, you still owe tax on that interest — you just won't receive the form. The interest is reported to the IRS automatically, so the IRS knows what you earned even if your bank does not send you paperwork.

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 Illinois, Mississippi, and Tennessee — do not tax interest income at all, but those are exceptions.

Key Takeaways

  • All savings account interest is taxable federal income, regardless of the amount, and you report it on Form 1040 or 1040-SR.
  • Your bank sends Form 1099-INT only if interest reaches $10, but you owe tax on smaller amounts too.
  • Most states tax savings interest at the same rate as federal income, though a few states exempt it entirely.
  • High-yield savings accounts earn more interest but create a larger tax bill in the same year.
  • You can reduce taxable interest by holding money in tax-advantaged accounts like Roth IRAs or 529 plans, which do not report interest to the IRS.

How the IRS knows about your interest income

Banks report interest to the IRS using Form 1099-INT. Your bank sends a copy to you and files a copy with the IRS. The IRS matches what you report on your tax return against what the bank reported, so underreporting or omitting interest income creates a mismatch that can trigger an audit notice.

The $10 threshold is a reporting threshold, not a tax threshold. If you earned $8 in interest, your bank will not send you Form 1099-INT, but the IRS still expects you to report that $8 on your return. Many people miss small amounts of interest because they assume no form means no reporting requirement — that assumption is wrong.

If you have multiple savings accounts at different banks, each bank reports its own interest separately. You add all of it together when you file. The IRS receives all the 1099-INT forms and totals them on their end, so they know your real interest income even if you try to hide one account.

What tax rate applies to your interest income

Savings account interest is taxed as ordinary income, which means it is taxed at the same rate as your wages or salary. If you are in the 22 percent federal tax bracket, your interest is taxed at 22 percent. If you are in the 12 percent bracket, it is taxed at 12 percent. The rate depends on your total income for the year, not on the interest alone.

This is different from long-term capital gains, which are taxed at lower rates (0, 15, or 20 percent depending on income). Interest income gets no preferential rate — it is treated like regular income from the moment it hits your account.

State tax rates vary. Most states that tax income apply their standard income tax rate to interest. Some states have a flat tax (Indiana, Illinois, Massachusetts, and Pennsylvania, for example), while others use brackets like the federal system. A few states — Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all, so residents pay no state tax on interest.

When you receive the Form 1099-INT

Banks mail Form 1099-INT by January 31 each year for interest earned during the previous calendar year. If you earned interest in 2024, you will receive the form by January 31, 2025. Some banks also make the form available online through your account dashboard before mailing it.

If you do not receive a 1099-INT by early February, contact your bank directly. Ask them to resend it or provide the interest amount so you can report it yourself. Do not wait until tax day — you need the form to file accurately, and the IRS has already received a copy.

If your bank sends you a 1099-INT with an incorrect amount, ask them to issue a corrected form (Form 1099-INT with a "CORRECTED" box checked). Once you receive the corrected form, file an amended return if you have already filed, or include the corrected amount if you have not yet filed.

High-yield savings accounts and your tax bill

High-yield savings accounts pay significantly more interest than traditional savings accounts — sometimes 4 to 5 percent annually instead of 0.01 percent. That higher interest creates a higher tax bill in the same year. If you earn $500 in interest from a high-yield account, you owe tax on that full $500 at your ordinary income rate, even though you did not withdraw the money.

The tax is due when you file your return, not when the interest is deposited. Many people move money to high-yield accounts late in the year and are surprised by the tax bill the following spring. If you expect significant interest income, consider setting aside money to cover the tax when it comes due.

Some high-yield accounts are offered through banks that also offer tax-advantaged products. If you have access to a Roth IRA or a Health Savings Account (HSA), interest earned inside those accounts is not taxed and not reported to the IRS — but you must follow the account's contribution and withdrawal rules to keep that tax benefit.

Reporting interest on your tax return

You report savings account interest on Form 1040 or Form 1040-SR (the standard federal income tax form). The interest goes on Line 2b under "Interest." If you use tax software, you enter the amount from your 1099-INT forms, and the software places it in the correct location automatically.

If you have interest from multiple sources — savings accounts, CDs, bonds, or other investments — you add all of it together and report the total on Line 2b. You do not need to list each source separately on the main form, though you may need to attach a schedule if the total exceeds a certain amount (currently $1,500).

On your state return, you report the same interest income in the interest section of your state's income tax form. The process is similar: you add all interest together and report the total. If your state does not tax income, you do not report it on a state return at all.

Interest from CDs and money market accounts

Certificates of Deposit (CDs) and money market accounts work the same way as savings accounts for tax purposes. The interest is taxable income, reported on Form 1099-INT, and taxed at your ordinary income rate. If you have a CD that matures in the middle of the year, you owe tax on the interest that year, even if you immediately roll it into a new CD.

Some CDs pay interest at maturity rather than monthly or quarterly. You still owe tax on that interest in the year it is paid to you, not in the year you withdraw the principal. If a CD matures on December 15 and pays $200 in interest, that $200 is taxable in that calendar year.

If you cash out a CD early and pay an early withdrawal penalty, you can deduct that penalty from your interest income on your tax return. The penalty reduces your taxable interest, which lowers your tax bill slightly. Report the penalty on Form 1040, Line 2, with a note explaining what it is.

Frequently Asked Questions

What if I earned less than $10 in interest — do I still have to report it?

Yes. The $10 threshold only determines whether your bank sends you Form 1099-INT. You owe tax on all interest income, no matter how small. If you earned $3 in interest, report it on your return. The IRS expects accuracy, and small amounts add up across many accounts.

Can I deduct savings account interest as a business expense?

No. Interest earned on personal savings is income, not a deductible expense. If you have a business savings account and earn interest on business funds, that interest is still taxable income to your business, but it is not a deductible expense — it is simply income your business earned.

Do I owe tax on interest if I did not withdraw the money?

Yes. You owe tax on interest in the year it is credited to your account, whether you withdraw it or leave it there to compound. The IRS taxes interest as soon as it is earned, not when you spend it. If you leave interest in the account, it becomes part of your principal and earns interest next year, which is also taxable.

What happens if my bank reports the wrong amount of interest?

Contact your bank and ask for a corrected Form 1099-INT. Once you receive it, file an amended return (Form 1040-X) if you have already filed. If you have not filed yet, wait for the corrected form and use the correct amount when you file. The IRS will match your return against the corrected form the bank filed.

Are there any savings accounts where interest is not taxed?

Interest earned in regular savings accounts is always taxed. However, interest earned inside a Roth IRA, Roth 401(k), or Health Savings Account (HSA) is not taxed and not reported to the IRS, as long as you follow the account's rules. These accounts have contribution limits and withdrawal restrictions, so they are not suitable for all savings goals.