Savings account interest counts as taxable income
Yes, you owe federal income tax on the interest your savings account earns. The IRS treats interest as ordinary income, taxed at the same rate as your wages or salary. If you earned $50 in interest last year, that $50 is added to your total income for tax purposes.
Your bank reports this interest to both you and the IRS on a Form 1099-INT by January 31 each year. You then report that same amount on your tax return. The tax you owe depends on your total income and your tax bracket — someone in the 22% bracket pays roughly 22 cents per dollar of interest earned, while someone in the 12% bracket pays roughly 12 cents.
Most savings accounts earn very little interest, so the tax impact is small. But if you have a high-yield savings account, a certificate of deposit (CD), or a money market account, the interest can be substantial enough to matter when you file.
Key Takeaways
- Banks report savings interest to the IRS on Form 1099-INT, and you must report the same amount on your tax return.
- You pay income tax on interest at your regular tax rate, which depends on your total income and filing status.
- If you earned $10 or more in interest from a single bank, you will receive a Form 1099-INT; report all interest even if the amount is under $10.
- Interest from high-yield savings accounts, CDs, and money market accounts is taxed the same way as regular savings interest.
- You can reduce taxable interest income by holding savings in tax-advantaged accounts like IRAs or 529 plans, where interest grows tax-free or tax-deferred.
When the bank sends you Form 1099-INT
Your bank mails or emails Form 1099-INT by January 31 of the year following the one in which you earned the interest. If you earned interest in 2024, you receive the form by January 31, 2025. The form shows the total interest paid to you during that calendar year.
Banks are required to send a 1099-INT if you earned $10 or more in interest from that bank during the year. However, you must report all interest income on your tax return, even if you earned less than $10 and did not receive a form. If you have multiple savings accounts at different banks, each bank sends its own 1099-INT, and you add them all together when you file.
Check your bank's website or call if you do not receive a 1099-INT by early February. If the form is lost or delayed, your bank can send a duplicate or provide the interest amount over the phone.
How to report interest on your tax return
When you file your federal tax return, you report interest income on Schedule B (if you use the long form) or directly on your 1040 if the amount is small. The total interest from all your accounts goes into one line, which then flows to your main income total.
If you use tax software like TurboTax, H&R Block, or the IRS Free File program, you enter the interest amount when prompted, and the software places it in the correct spot. If you file by hand or with a tax preparer, they will ask you for all 1099-INT forms and add the totals to your return.
State income tax works the same way — you report the same interest amount on your state return (if your state has income tax). A few states do not tax interest income, but most do.
The difference between high-yield and regular savings accounts
High-yield savings accounts earn more interest than traditional savings accounts — often 4% to 5% annually compared to 0.01% or less at big banks. That higher rate means more taxable income. If you have $10,000 in a high-yield account earning 4.5%, you earn $450 in interest per year, all of which is taxable.
CDs and money market accounts work the same way. The interest rate is higher, so the tax bill is higher, but the tax treatment is identical — it is all ordinary income reported on Form 1099-INT.
The tax impact is one reason some people keep emergency savings in a high-yield account (for the interest) and long-term savings in a tax-advantaged account like a Roth IRA or 529 plan (where interest grows tax-free). The choice depends on your total savings, your tax bracket, and whether you need the money within a few years.
Joint accounts and multiple account holders
If you own a savings account jointly with another person, the bank reports the total interest on separate 1099-INT forms — one for you and one for your co-owner. Each of you reports your share on your own tax return. The bank divides the interest based on the ownership percentage you provided when you opened the account, or 50-50 if no percentage was specified.
If you are unsure how the bank divided the interest, call and ask. The 1099-INT will show the amount assigned to you, and that is the amount you report — not half the total.
For accounts owned by a minor, a parent or guardian reports the interest on their own return if the child has no other income. If the child has earned income (from a job, for example), the child may file their own return and report the interest there. The rules are complex, so check with a tax preparer if you have a child's savings account.
What happens if you do not report interest income
The IRS receives a copy of every 1099-INT your bank sends to you. If you do not report the interest on your return, the IRS will notice the discrepancy when it matches your return against the forms it received from banks. This can trigger an audit or a notice asking you to explain the missing income.
Penalties for underreporting income include back taxes owed plus interest (charged by the IRS, not your bank) and accuracy-related penalties of 20% of the underpaid tax. If the underreporting was intentional, fraud penalties can reach 75% of the underpaid tax. Even small amounts of unreported interest can start an audit.
The safest approach is to report all interest, even if the amount is small or you did not receive a 1099-INT. It takes one line on your return and avoids the risk of an IRS notice.
Tax-advantaged accounts where interest is not taxed annually
If you want to save money and avoid paying tax on the interest each year, consider a Roth IRA or Roth 401(k). Interest earned inside these accounts is not taxed annually — it grows tax-free, and you pay no tax when you withdraw it in retirement (as long as you follow the rules). You do have to pay tax on the money you put in, but the interest itself is sheltered.
A 529 college savings plan works similarly for education expenses. Interest grows tax-free as long as you use the money for may have access to education costs like tuition or room and board. If you withdraw the money for other purposes, you pay tax on the interest portion plus a 10% penalty.
A traditional IRA also defers tax on interest, but you pay tax on the withdrawals in retirement rather than avoiding tax altogether. These accounts have contribution limits and withdrawal rules, so they are not right for everyone, but they are worth considering if you have money you do not need for several years.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. Banks only send a 1099-INT if you earned $10 or more, but you must report all interest income on your tax return, no matter how small. The IRS expects you to report every dollar of interest you earned.
What if my bank sent me a 1099-INT with the wrong amount?
Contact your bank immediately and ask them to issue a corrected form (called an amended 1099-INT). Once you receive the corrected form, file an amended tax return (Form 1040-X) showing the correct interest amount. Do this as soon as you notice the error to avoid IRS notices.
Can I deduct interest I paid on a loan from the interest I earned on savings?
No. Interest you earned on savings is added to your income. Interest you paid on a loan (like a mortgage or student loan) may be deductible in some cases, but you cannot net them against each other. They are reported separately on your return.
Does interest from a money market account get taxed differently?
No. Money market accounts are taxed exactly like savings accounts and CDs — the interest is reported on Form 1099-INT and taxed as ordinary income at your regular tax rate.
What if I moved money between banks during the year?
Each bank reports only the interest earned while the money was in their account. If you moved $5,000 from Bank A to Bank B in July, Bank A reports interest earned January through June, and Bank B reports interest earned July through December. You add both 1099-INT forms together when you file.