Savings account interest is 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 $100 in interest, that $100 counts toward your total taxable income for the year, just like wages or salary do.

Most banks and credit unions send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. You report that amount on your federal tax return. Some states also tax savings interest, though a few states exempt it entirely.

The amount you owe depends on your tax bracket. If you're in the 22% federal bracket, $100 in interest costs you $22 in federal tax. If you're in the 12% bracket, it costs $12. State tax, if your state has it, stacks on top of that.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax rate, plus state tax if your state has an income tax.
  • Banks report interest of $10 or more on Form 1099-INT, which you receive by January 31 and must report on your tax return.
  • You report the interest on Schedule 1 (Form 1040) or Schedule B if you have more than $1,500 in interest income.
  • High-yield savings accounts earn more interest but also create a larger tax bill in the same year.
  • If you don't receive a 1099-INT but earned interest, you still owe tax on it and should report it on your return.

When banks send you Form 1099-INT

Your bank mails or emails Form 1099-INT by January 31 each year if you earned $10 or more in interest during the previous calendar year. The form shows the total interest paid to you in box 1. You get one form per bank account, so if you have multiple savings accounts at the same bank, they may combine the interest on one form or send separate forms depending on how the accounts are structured.

The $10 threshold is a reporting requirement, not a tax threshold. If you earned $5 in interest and your bank didn't send a 1099-INT, you still owe tax on that $5. You report it yourself on your return.

Keep the 1099-INT with your tax records. You don't mail it to the IRS — the bank sends a copy directly to them. But you need it to fill out your return accurately, and you may need it if the IRS ever questions your reported income.

Where to report interest income on your tax return

If your total interest income is $1,500 or less, you report it on line 2b of Schedule 1 (Form 1040), which is part of your main federal return. Write the total interest from all your 1099-INT forms on that line.

If you have more than $1,500 in interest income, you must use Schedule B (Interest and Ordinary Dividends) instead. Schedule B asks you to list each source of interest separately — each bank account, each CD, each bond. You then transfer the total from Schedule B to Schedule 1, line 2b.

The IRS cross-checks your return against the 1099-INT copies banks send them, so the numbers must match. If your return shows $500 in interest but the bank reported $600, the IRS will send you a notice asking for the difference.

State taxes on savings interest

Most states with an income tax also tax savings interest the same way the federal government does. You report it on your state return using the same 1099-INT form. A few states — including Pennsylvania, Illinois, and Mississippi — exempt interest income from state tax, so you owe federal tax but not state tax.

If you live in a state with an income tax, check your state's tax agency website or your state return instructions to confirm whether interest is taxable in your state. The rules can change, and some states have phase-outs or exemptions for certain types of interest (like municipal bond interest, which is usually exempt federally).

If you moved during the year, you may owe tax to both your old state and your new state, depending on when you moved and each state's rules. Your state return instructions will walk you through how to handle that.

High-yield savings accounts and your tax bill

High-yield savings accounts pay 4% to 5% annual interest, compared to 0.01% or less at traditional banks. That means a $10,000 balance earns $400 to $500 per year instead of $1. The upside is real money in your account. The downside is a real tax bill in the same year.

If you earn $400 in interest and you're in the 22% federal tax bracket, you owe $88 in federal tax on that interest. If your state taxes interest at 5%, you owe another $20. Your net gain is $292, not $400. That's still better than earning $1 at a traditional bank, but it's important to know the math before you move your money.

The interest is taxed in the year you earn it, even if you don't withdraw it. If you earn $400 in interest in 2024, you owe tax on it in 2024, whether you leave the money in the account or spend it.

What to do if you don't receive a 1099-INT

If you earned $10 or more in interest and your bank didn't send a 1099-INT by February 15, contact the bank directly. Ask them to send it or provide the interest amount so you can report it yourself. Most banks can email or remail the form quickly.

If the bank says you earned less than $10 and didn't send a form, ask them for the exact amount. You still owe tax on it. Report it on your return even without the form — the IRS may not catch it, but if they do, you'll owe the tax plus penalties and interest.

If you moved and didn't update your address with the bank, the 1099-INT may have gone to your old address. Contact the bank with your new address and ask them to resend it or provide the information by phone or email.

Interest from CDs, money market accounts, and other savings products

Certificates of Deposit (CDs), money market accounts, and savings bonds all generate interest that's taxed the same way as savings account interest. Each source sends its own 1099-INT, and you report all of them on your tax return.

If you withdraw money from a CD before the maturity date, you typically pay an early withdrawal penalty. That penalty is not tax-deductible, but it does reduce the net interest you earn. If a CD earned $200 in interest and you paid a $50 penalty, you report $200 as interest income and the $50 penalty is just a cost you absorb.

U.S. Savings Bonds (Series EE and I bonds) work differently. The interest is not taxed each year — it's taxed when you cash the bond or when it matures. You can also choose to report the interest each year on your return if you prefer, which can help if you're in a lower tax bracket in a particular year.

Frequently Asked Questions

Do I owe taxes on interest if I earned less than $10?

Yes. The $10 threshold only determines whether your bank sends you a 1099-INT. You owe tax on all interest income, no matter how small. Report it on your return even if you don't have a form.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount on your return. Savings account fees are not deductible. However, if your bank charged you a fee that reduced your interest, the 1099-INT should already reflect the net amount after fees.

What if I earned interest but the bank made a mistake on the 1099-INT amount?

Contact the bank and ask them to issue a corrected 1099-INT (marked as a correction). They'll send a corrected copy to you and the IRS. Report the corrected amount on your return. If you already filed, you may need to file an amended return.

Do I owe taxes on interest if I'm a minor with a savings account?

Yes, but the minor files their own return if the interest exceeds the standard deduction for that year. A parent cannot claim the interest as their own income. The minor's return is separate from the parent's return.

Is interest from a joint savings account split between both owners for tax purposes?

Not automatically. The bank reports the full interest amount on a 1099-INT. If the account is truly joint and both owners contributed equally, you may split the interest 50/50 on your separate returns, but you need to keep records showing the split. The IRS may ask for documentation if the split doesn't match the 1099-INT.