Interest on savings accounts is taxable income to the IRS
Yes, you owe federal income tax on interest your savings account earns. The IRS treats it as ordinary income, taxed at the same rate as your wages or salary. If you earned $50 in interest over the year, that $50 counts toward your total taxable income for the year.
The amount you owe depends on your tax bracket — the higher your total income, the higher the tax rate on that interest. A person in the 22% bracket pays roughly 22 cents in federal tax for every dollar of interest earned. State income tax also applies in most states, adding another 3% to 13% depending on where you live.
Banks and credit unions report the interest you earned to both you and the IRS on a Form 1099-INT, usually by January 31 each year. You then report that same amount on your tax return. The IRS cross-checks the two documents, so underreporting or omitting it creates a mismatch they will catch.
Key Takeaways
- Interest earned in savings accounts, money market accounts, and certificates of deposit is taxable as ordinary income at your full tax bracket rate.
- Your bank sends you a Form 1099-INT by January 31 showing all interest paid, and you must report this amount on your tax return.
- You owe both federal tax and state income tax on interest, though some states do not tax interest income.
- Interest under $10 may not require a Form 1099-INT from the bank, but you still owe tax on it if you file a return.
- High-yield savings accounts earn more interest than traditional savings accounts, which means a larger tax bill on the same account balance.
How the IRS knows about your interest income
Banks file Form 1099-INT with the IRS for any account holder who earned $10 or more in interest during the tax year. You receive a copy in the mail or electronically, usually by January 31. The form shows the account number, the bank's name, and the exact dollar amount of interest paid.
The IRS receives an identical copy. When you file your tax return, the IRS computer matches the 1099-INT the bank filed against the interest income you reported. If the numbers do not match, or if you did not report it at all, the IRS flags it for review. This mismatch is one of the most common reasons for IRS notices and corrections.
Even if you earned less than $10 in interest and did not receive a 1099-INT, you still owe tax on that interest if you file a return. The bank simply does not have to send the form. You are responsible for tracking it and reporting it yourself.
What tax rate applies to your interest income
Interest is taxed as ordinary income, meaning it is added to your wages, self-employment income, and other earnings, then taxed at your marginal tax bracket. If you earn $50,000 in wages and $500 in interest, the IRS treats your total taxable income as $50,500.
Federal tax brackets for 2024 range from 10% to 37% depending on your total income and filing status. A single filer with $50,000 in total income falls into the 22% bracket, so roughly $110 of that $500 in interest goes to federal tax. A married couple filing jointly with the same income would be in the 12% bracket, paying roughly $60.
State income tax rates vary widely. New York taxes interest at up to 10.9%, while Texas, Florida, and several other states do not tax interest income at all. A few states tax interest but not wages. Check your state's tax authority website to find your rate.
High-yield savings accounts and the tax trade-off
High-yield savings accounts pay 4% to 5% annual interest, compared to 0.01% to 0.5% at traditional banks. On a $10,000 balance, that difference means $400 to $500 per year instead of $10 to $50. The catch is that higher interest means a higher tax bill.
If you earn $500 in interest and are in the 22% federal bracket plus a 5% state bracket, you owe roughly $135 in combined tax. Your net gain after tax is $365. That is still far better than the $10 you would earn at a traditional bank, but the tax reduces your real return by about 27%.
The tax does not change whether the account is at a traditional bank or an online bank. The only difference is the interest rate itself. Online banks typically offer higher rates because they have lower overhead costs, not because of any tax advantage.
Reporting interest on your tax return
You report interest income on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in total interest and dividends for the year. If you have $1,500 or less, you can report it directly on Form 1040, line 2b, without filing Schedule B.
List each Form 1099-INT you received, or combine them into a single line if you have multiple accounts at the same bank. The total goes on your return, and the IRS matches it against the 1099-INT forms the banks filed.
If you did not receive a 1099-INT but earned interest (usually because it was under $10), you still report it. Write "Other interest" or the bank name and the amount on Schedule B or line 2b. Keeping your own records of interest earned protects you if the IRS questions the amount.
States that do not tax interest income
Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, but phases out the tax). If you live in one of these states, you owe only federal tax on your interest.
A few other states tax interest at a lower rate than wages, or offer deductions for interest income. Illinois, for example, does not tax interest income at all. Check your state's Department of Revenue website to confirm the rules for your state, since they change occasionally.
If you moved during the year, you may owe tax to two states. Some states tax interest based on where you lived when you earned it, while others tax based on where you lived on December 31. File a return in both states if you are unsure, and claim a credit for taxes paid to one state on your return to the other.
What happens if you do not report interest income
The IRS will find the mismatch between the 1099-INT the bank filed and your tax return. This typically results in a notice in the mail, usually 6 to 12 months after you file. The IRS will propose a correction, add the interest you missed, recalculate your tax, and bill you for the difference plus interest and penalties.
Penalties for underreporting income are typically 20% of the underpaid tax. If you owed $30 in tax on $500 of unreported interest and paid nothing, you would owe $30 in tax plus $6 in penalty (20% of $30), plus interest on both amounts from the original due date. The interest compounds daily and can add up quickly over several years.
If the error was unintentional and you have a clean history, you can request reasonable cause relief to reduce or eliminate the penalty. The IRS is more likely to grant this if you file an amended return yourself before they contact you.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. The bank does not have to send you a Form 1099-INT, but you still owe tax on any interest you earned. Keep your own records from your bank statements and report the amount on your tax return.
Can I deduct savings account fees against the interest I earned?
No. Interest is taxable income, and account fees are not deductible. You report the full interest amount and pay tax on it, even if fees reduced your net gain. Some high-yield accounts charge no fees, which makes them more attractive.
What if I moved money between accounts during the year?
The interest is taxable regardless of when you moved the money or how many accounts you used. The bank reports interest based on the account it was earned in. If you had multiple accounts, you will receive multiple 1099-INT forms, and you report the total of all of them.
Does a joint account change how I report interest?
Yes. If the account is held jointly with someone else, the bank typically reports half the interest to each person's Social Security number. Each person reports their half on their own tax return. If the ownership split is different (one person owns 75%, the other 25%), ask the bank to report it that way instead.
Is interest from a CD taxed the same way as a savings account?
Yes. Certificates of deposit earn interest that is taxed as ordinary income at your full tax bracket rate. The bank reports it on Form 1099-INT just like savings account interest. You owe tax on the interest even if you have not withdrawn the money yet.