Savings account interest is taxable income to the IRS
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 — not at a lower capital gains rate. If you earned $50 in interest, that $50 counts toward your total taxable income for the year, just like wages or freelance pay.
How much tax you actually pay depends on your total income and your tax bracket. Someone in the 22% bracket pays roughly $11 in federal tax on that $50 of interest. Someone in the 12% bracket pays roughly $6. State income tax, where it exists, adds on top of that. The bank does not withhold this tax automatically — you report it yourself when you file your return.
The threshold for reporting is low. If you earned more than $10 in interest during the year, your bank will send you a Form 1099-INT by January 31. Even if you earned less than $10, you still owe tax on it — you just will not receive a form. The IRS expects you to report all interest income, no matter the amount.
Key Takeaways
- Savings account interest is taxed as ordinary income at your regular tax rate, not as a capital gain.
- Your bank sends you a Form 1099-INT if you earned more than $10 in interest; you report this on your tax return.
- You owe tax on all interest income, even amounts under $10 that do not generate a 1099-INT form.
- High-yield savings accounts earn more interest but also generate higher tax bills in the same year.
- State income tax applies to savings interest in most states, adding to your federal tax liability.
When your bank sends you a 1099-INT form
Your bank mails or makes available a Form 1099-INT by January 31 if you earned more than $10 in interest during the previous calendar year. This form shows the total interest paid to you and goes to both you and the IRS. The IRS already has a copy, so they will notice if your tax return does not match.
The form lists interest in Box 1. If you earned interest from multiple banks or accounts, you may receive multiple 1099-INT forms — one from each institution. You add all of them together when you report your total interest income. Some banks combine interest from multiple accounts you hold with them on a single form.
If you did not receive a 1099-INT but earned interest, contact your bank. They may have the wrong mailing address on file, or the interest may have been credited after the form was generated. You can request a corrected form or ask them to email it. Either way, you still owe tax on that interest even without the form in hand.
How to report interest income 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 total interest and dividends combined. If you have less than that, you can report the interest directly on line 2b of Form 1040 without filing Schedule B. Many tax software packages handle this automatically — you enter the 1099-INT information and the software places it in the right spot.
The interest amount flows into your total income, which determines your tax bracket and affects whether you owe tax overall. It can also push you into a higher bracket if your other income is already substantial. For example, if you earned $50,000 in wages and $2,000 in interest, the IRS treats you as having $52,000 in taxable income.
State tax returns vary by state. Most states that have income tax require you to report interest on your state return as well, usually on a line labeled "Interest Income" or similar. A few states — including New Hampshire and Tennessee — do not tax interest income, though they tax other investment income. Check your state's tax form or website to confirm what applies to you.
Interest from high-yield savings accounts and money market accounts
High-yield savings accounts and money market accounts pay significantly more interest than traditional savings accounts — sometimes 4% to 5% annually compared to 0.01% at a brick-and-mortar bank. That higher interest is real money in your account, but it also means a larger tax bill in the same year. A $10,000 balance earning 4.5% generates $450 in taxable interest; at your tax rate, that could cost $50 to $100 or more in federal tax alone.
The tax treatment is identical to any other savings interest — it is ordinary income, reported on a 1099-INT, and taxed at your regular rate. The bank does not withhold tax, so you need to account for it when you plan your finances or estimate taxes. Some people set aside a portion of the interest earnings to cover the tax bill, or they report quarterly estimated tax payments if the interest is large enough.
This is one reason some people keep emergency funds in high-yield accounts despite the tax cost: the interest earned still exceeds what they would earn in a traditional account, even after taxes. A $10,000 emergency fund earning $450 in interest and owing $100 in tax still leaves you $350 ahead of a 0.01% account that earns $1.
Interest from CDs and other fixed-rate accounts
Certificates of Deposit (CDs) and fixed-rate savings products work the same way for tax purposes as regular savings accounts. The interest is taxable income, reported on a 1099-INT, and owed in the year the interest is credited to your account — even if you do not withdraw the money until later.
This matters most with CDs that mature in a later year. If you buy a 2-year CD in December 2024, the interest earned in 2024 is taxable in 2024, and the interest earned in 2025 is taxable in 2025. You do not wait until the CD matures to pay tax. The bank reports the interest on a 1099-INT for each year, and you report it on your return for that year.
Early withdrawal penalties do not reduce your taxable interest. If you withdraw $5,000 from a CD early and the bank charges a $100 penalty, you still owe tax on the full interest earned. However, you can deduct the penalty on your tax return (on line 30 of Form 1040), which offsets some of the tax cost.
Interest from bonds and Treasury securities
Interest from U.S. Treasury bonds, notes, and bills is taxable at the federal level but exempt from state income tax. Interest from municipal bonds issued by your home state is usually exempt from both federal and state tax, though bonds from other states are taxed federally. Corporate bonds and bond funds are taxed like any other interest income.
Treasury interest is reported on a 1099-INT just like savings account interest. The exemption from state tax is automatic — you do not have to do anything special. When you file your state return, you report your federal taxable income but then subtract the Treasury interest to arrive at your state taxable income.
Municipal bond interest is also reported on a 1099-INT, but it is marked as tax-exempt. You still report it on your federal return (on Schedule B), but it does not add to your taxable income. Some tax software flags this automatically; others require you to specify that it is tax-exempt.
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 that interest on your tax return, the IRS will notice the discrepancy. They may send you a notice asking for the missing income, or they may simply assess the tax, interest, and penalties on your account.
The penalty for underreporting income is typically 20% of the underpaid tax, plus interest calculated from the original due date. If you owed $100 in tax on $500 of unreported interest and did not pay it, you could owe $120 in penalties plus interest — often several years of interest if the return is old. Paying the tax late is far cheaper than ignoring it.
If you made an honest mistake, filing an amended return (Form 1040-X) as soon as you notice the error can reduce or eliminate penalties. The IRS is more lenient with taxpayers who correct their own mistakes than with those caught during an audit. Report the interest, pay what you owe, and move on.
Frequently Asked Questions
Do I owe tax on interest if I earned less than $10?
Yes. Your bank only sends a 1099-INT if you earned more than $10, but you owe tax on all interest income, no matter how small. If you earned $5 in interest, you still report it on your return. The $10 threshold is only for the bank's reporting requirement, not for your tax obligation.
Can I deduct savings account interest as a business expense?
No. Interest earned on a personal savings account is not deductible. If you have a business account and earn interest on business funds, that interest is still taxable income to the business, not a deductible expense. Only interest you pay (like on a business loan) can be deducted.
What if I moved money between banks and received two 1099-INT forms for the same interest?
Contact both banks and ask for corrected forms. If you transferred funds mid-year, each bank may have reported the interest earned while you held the account with them. One bank should issue a corrected 1099-INT showing zero interest, and the other should show the full amount. Do not report the interest twice on your return.
Does interest from a joint savings account get split between owners for tax purposes?
The bank reports the full interest amount on a 1099-INT to the Social Security number listed as the primary account holder. If you and another person own the account jointly, you will need to split the interest income between you based on your ownership share and report your portion on your return. The other owner should report their portion on theirs. Coordinate with the other owner to avoid both reporting the full amount.
If I have no other income, do I still owe tax on savings interest?
It depends on your filing status and age. For 2024, a single person under 65 with no other income does not owe federal tax if their total income is under $14,600. If your only income is $500 in savings interest, you do not owe federal tax — but you should still file a return to report it, because the IRS has a copy of the 1099-INT. Filing protects you from penalties and establishes a record.