Interest from your savings account counts as taxable income
Yes, you owe federal income tax on the interest your savings account earns. The IRS treats it as ordinary income, taxed at your regular income tax rate. If you earned $10 in interest, that $10 is added to your other income for the year and taxed accordingly. Most banks and credit unions send you a Form 1099-INT in January showing how much interest you earned in the previous year, and you report that amount on your tax return.
State income tax works the same way in most states — the interest is taxable at your state rate too. A handful of states (Illinois, Iowa, Kansas, Louisiana, Mississippi, Missouri, and Pennsylvania) do not tax interest income, so if you live in one of those, you skip the state portion. But federal tax still applies no matter where you live.
The amount of tax you actually pay depends on your total income and tax bracket. Someone in the 12% federal bracket pays 12 cents in federal tax on every dollar of interest. Someone in the 22% bracket pays 22 cents. The interest itself is small for most people — the average savings account earns less than 1% annually — but it still has to be reported.
Key Takeaways
- Interest earned in a savings account is taxable income at both federal and state levels, reported on Form 1099-INT.
- You report the interest amount on your tax return even if the bank does not send you a 1099-INT (which happens when interest is under $10).
- High-yield savings accounts and money market accounts earn more interest than traditional savings accounts, which means higher tax liability.
- You can reduce taxable interest income by holding money in tax-advantaged accounts like IRAs, 401(k)s, or Roth accounts, where interest grows tax-free.
When the bank sends you Form 1099-INT
Banks mail Form 1099-INT to you and the IRS by January 31 each year. The form shows all the interest you earned in that calendar year. You will receive one 1099-INT per bank account if the interest was $10 or more. If you earned less than $10 in interest at a particular bank, they do not have to send you a form, but you still owe tax on that interest.
If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. Add all the interest amounts together when you file your return. If you have accounts at the same bank but in different names (like a joint account and a solo account), the bank may combine them on one form or send separate forms — check what you receive.
Some online banks and credit unions send the 1099-INT electronically instead of by mail. Check your account portal in late January or call the bank if you do not see the form by February 1. You need it to file your return accurately, though you can file without it if you know the interest amount from your account statements.
How to report interest on your tax return
On a federal return, you report interest income on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest and dividends combined. If you have less than that, you can report the interest directly on Form 1040, line 2b. Most people with a single savings account fall into the second group.
Write the name and account number of each bank, then the interest amount from the 1099-INT. Add up all interest from all accounts and enter the total on the appropriate line. The IRS matches this number to the 1099-INT the bank sent them, so accuracy matters — if your return shows $50 but the bank reported $55, the IRS will notice and send you a notice.
For state taxes, follow your state's instructions. Some states have a separate schedule for interest income; others let you report it directly on the main return. Check your state tax authority's website or your tax software for the specific line or form.
Interest under $10 and unreported earnings
If you earned less than $10 in interest at a bank, you will not receive a 1099-INT from that bank. You still owe tax on it. Add that interest to your return using your account statement as proof. The IRS does not know about it unless the bank reported it, but that does not mean you skip reporting it — you are required to report all income, regardless of whether a form was issued.
This matters most if you have multiple small accounts or if you moved money between banks mid-year. Keep your year-end statements from every bank so you can add up all interest, even the small amounts. If you are audited, the IRS will ask to see those statements.
High-yield savings accounts and tax liability
High-yield savings accounts earn 4% to 5% annually (rates vary by bank and change frequently), compared to 0.01% at traditional banks. That means much more interest income and much higher tax liability. A $10,000 deposit in a high-yield account earning 4.5% generates $450 in interest per year. At a 22% tax bracket, that is $99 in federal tax owed.
Money market accounts work the same way — the interest is taxable. Certificates of deposit (CDs) are also taxable, and you owe tax on the interest even if you do not withdraw the money until the CD matures. If a CD matures in January but you do not touch the money, you still report the interest on that year's return.
If you are saving for a specific goal and want to minimize taxes, consider whether a tax-advantaged account makes sense. A Roth IRA or Roth 401(k) lets interest grow tax-free, though there are contribution limits and withdrawal rules. A traditional IRA or 401(k) defers the tax until you withdraw the money in retirement.
What happens if you do not report interest income
If the IRS receives a 1099-INT from your bank but your return does not show that interest, the IRS will send you a notice. They will calculate the tax you owe plus interest and penalties. The penalty for underpayment is usually 20% of the unpaid tax, plus interest that compounds daily. A $100 mistake can become $125 or more by the time you pay.
If you simply forgot to report interest under $10 because no 1099-INT was issued, the risk is lower — the IRS has no record of it — but you are still breaking the law. If you are audited for other reasons and the auditor reviews your bank statements, they will find it.
The safest approach is to report all interest, no matter how small. It takes two minutes and keeps you in the clear.
Tax-advantaged alternatives to regular savings accounts
If you want to save money without paying tax on the interest each year, a Roth IRA or Roth 401(k) lets interest and other earnings grow tax-free. You contribute after-tax dollars, but withdrawals in retirement are tax-free. The catch: you cannot withdraw the money before age 59½ without penalties (with some exceptions), and there are annual contribution limits ($7,000 for IRAs in 2024, higher for 401(k)s).
A traditional IRA or 401(k) defers the tax. Interest grows without being taxed each year, but you pay income tax on withdrawals in retirement. This works well if you expect to be in a lower tax bracket when you retire.
For money you need to access soon, these accounts do not work. Stick with a regular or high-yield savings account, report the interest, and pay the tax. The tax is usually small enough that the higher interest rate still makes it worthwhile.
Frequently Asked Questions
Do I have to report interest if I did not receive a 1099-INT?
Yes. If you earned $10 or more in interest, the bank should send you a 1099-INT, but if they did not, you still report it using your account statement. If you earned less than $10, no form is required, but you still owe tax on it and should report it on your return.
What if I earned interest in multiple accounts at the same bank?
Add up all the interest from all accounts at that bank. The 1099-INT may combine them into one total, or the bank may send separate forms — either way, you report the combined total on your return. If you received multiple forms, add them together.
Can I deduct savings account interest as a loss?
No. Interest income is taxable, but you cannot deduct it as a loss or offset it against other income. You report it as income and pay tax on it at your regular rate.
Does a joint savings account change how I report interest?
The bank reports the full interest amount on the 1099-INT. If the account is joint with someone else, you and the other person need to split the interest based on your ownership percentage and each report your share on your own return. Coordinate with the other account holder to make sure you do not both report the full amount.
Is interest from a money market account taxed differently than savings account interest?
No. Money market account interest is taxed the same way as savings account interest — it is ordinary income reported on Form 1099-INT and added to your taxable income for the year.