Yes, you pay state income tax on savings account interest in most states
Interest earned in a savings account is taxable income at both the federal and state level in 41 states plus Washington, D.C. The interest counts as ordinary income, taxed at your regular state income tax rate. A few states—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—have no state income tax at all, so residents there owe nothing to the state on savings interest. New Hampshire and Tennessee tax only interest and dividend income, not wages.
Your bank reports the interest to you and to the IRS on a Form 1099-INT if you earned $10 or more in a calendar year. The same interest amount goes on your state tax return. You cannot avoid this by keeping the money in savings rather than investing it—the tax applies to the interest itself, not to how you earn it.
The amount of tax you owe depends on your state's tax brackets and your total income for the year. A person in a 5% state tax bracket pays roughly 5 cents per dollar of interest; someone in a 10% bracket pays 10 cents per dollar. The interest is added to your wages, self-employment income, and any other income you report, then taxed together.
Key Takeaways
- Savings account interest is taxable income in 41 states and Washington, D.C., taxed at your regular state income tax rate.
- Eight states have no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
- Your bank sends you a Form 1099-INT if interest reaches $10 or more in a year, and you report that same amount on your state return.
- The tax you owe on interest depends on your state's tax brackets and your total income for the year.
- High-yield savings accounts earn more interest but are still subject to state tax on every dollar earned.
How state tax on savings interest works
When you earn interest on a savings account, your bank calculates it and deposits it into your account. That interest is income the moment it hits your account, whether you withdraw it or leave it there. Your state considers it part of your taxable income for the year it was earned, not the year you spend it.
The tax is calculated using your state's income tax brackets. If you live in a state with a 4% flat tax, you owe 4% of the interest. If your state uses progressive brackets—where higher income is taxed at higher rates—the interest is added to your other income and taxed according to where the total falls. For example, if you earn $50,000 in wages and $500 in savings interest, your state taxes the full $50,500 as your income for the year.
You do not pay the tax to the bank. You pay it when you file your state income tax return, usually by April 15. The interest is reported on your return as part of your total income, and the tax owed is calculated from there.
States with no income tax on savings interest
Eight states impose no income tax at all, so residents owe nothing to the state on savings interest or any other income:
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Two additional states tax interest and dividends but not wages. New Hampshire taxes interest and dividend income at 5%, but not salary or self-employment income. Tennessee taxes interest and dividends at rates up to 6%, but not wages. If you live in either state and your income comes entirely from wages, you owe no state tax on savings interest—but if you have other income sources, the interest is still taxable.
If you move to one of these states, the tax treatment of your savings interest changes immediately. Interest earned after you establish residency in a no-tax state is not subject to state income tax. Interest earned before the move is taxed by your previous state of residence.
What happens if you earn very little interest
If your savings account earns less than $10 in interest during a calendar year, your bank does not send you a Form 1099-INT. However, you are still legally required to report the interest on your tax return if your state requires it. The threshold of $10 is only about whether the bank reports it to the IRS—not about whether you owe tax.
In practice, most people with interest under $10 do not report it because the amount is so small and the bank did not file a report. The IRS is unlikely to pursue someone over a few dollars. But technically, if you live in a state with income tax, that interest is taxable income in that state.
High-yield savings accounts currently earn 4% to 5% annually, so you hit $10 in interest fairly quickly—usually within a few months if you have $2,000 or more in the account. Once you cross that threshold, you will receive a 1099-INT and should report it.
How to report savings interest on your state return
When you file your state income tax return, you report the interest on a line for interest income. Most state returns have a specific section for interest and dividend income. You enter the total amount from your Form 1099-INT (or the actual interest if you did not receive a 1099-INT).
If you use tax software, it usually walks you through entering the 1099-INT information and automatically places it in the right spot on your state return. If you file by hand, your state's tax form instructions show where to report interest income. The interest is added to your other income, and your state tax is calculated on the total.
You do not need to send the 1099-INT with your return. Keep it for your records in case your state audits you, but the form itself stays with you.
The difference between federal and state tax on savings interest
Federal tax and state tax on savings interest are separate. You owe federal tax to the IRS on all savings interest, regardless of which state you live in. You also owe state tax to your state (if it has income tax) on the same interest. These are not deducted from each other—you pay both.
Your federal tax rate depends on your federal tax bracket for the year. Your state tax rate depends on your state's brackets and rates. A person in the 22% federal bracket and a 5% state bracket pays roughly 27% combined tax on savings interest (before any deductions or credits). The exact amount varies by state and by your total income.
Some states allow you to deduct federal taxes paid when calculating state tax, but most do not. Check your state's tax form or instructions to see if this applies to you.
Frequently Asked Questions
Do I pay state tax on interest from a money market account?
Yes. Money market accounts earn interest just like savings accounts, and that interest is taxable income at both the federal and state level in states with income tax. The bank reports it on a 1099-INT, and you report it on your state return the same way you would savings account interest.
What if I move to a different state during the year?
You owe tax to both states on a prorated basis. Interest earned while you lived in State A is taxed by State A; interest earned after you moved to State B is taxed by State B. You file a part-year return in each state showing the months you lived there. Your bank's 1099-INT shows the total interest for the full year, so you will need to calculate how much was earned in each state based on the dates you lived there.
Can I deduct savings account interest as a business expense?
No. Interest earned on a personal savings account is not deductible as a business expense, even if you are self-employed. It is personal income, not a business cost. Interest on a business savings account used for business purposes may have different treatment—consult a tax professional about that situation.
Does a high-yield savings account change how I report interest?
No. High-yield savings accounts earn more interest than traditional savings accounts, but the tax treatment is identical. The interest is still reported on a 1099-INT and taxed as ordinary income at both the federal and state level. You report it the same way on your state return.