Yes, you pay federal income tax on savings account interest, and most states tax it too
The interest your bank pays you on a savings account counts as taxable income. The IRS treats it the same way it treats wages or other money you receive — you owe federal income tax on it. Most states also tax savings interest as part of your state income tax. The amount you owe depends on how much interest you earned and your overall income for the year.
Your bank reports this interest to the IRS on a Form 1099-INT if you earned $10 or more in interest during the tax year. You receive a copy, and the IRS receives a copy. You then report that interest on your federal tax return. If you earned less than $10, your bank may not send a 1099-INT, but you still owe tax on the interest — you have to report it yourself.
Key Takeaways
- Banks report savings interest of $10 or more to the IRS on Form 1099-INT, which you receive by January 31.
- You report the interest on your federal tax return even if you did not receive a 1099-INT, because all interest income is taxable.
- The tax rate on interest depends on your overall income and tax bracket, not on the interest amount itself.
- Most states tax savings interest as ordinary income, though a few states have no income tax or special rules for retirement accounts.
- High-yield savings accounts earn more interest, which means you owe more tax — the interest is taxed at your marginal rate.
How banks report your interest to the IRS
If your savings account earned $10 or more in interest during the calendar year, your bank mails you a Form 1099-INT by January 31. This form shows the total interest paid to you in box 1. The bank sends an identical copy to the IRS. You use this form to fill out your tax return.
If you had multiple savings accounts at different banks, you will receive a separate 1099-INT from each bank. You add up all the interest from all the forms and report the total on your return. If you earned less than $10 in interest, the bank does not have to send you a 1099-INT, but you still owe tax on that interest — you report it yourself on your return.
The 1099-INT also shows the account number and the bank's name and tax ID. Check the form for accuracy when it arrives. If the amount is wrong, contact your bank immediately and ask for a corrected form. The bank will send a corrected 1099-INT to you and the IRS.
What tax rate applies to your interest income
Savings interest is taxed as ordinary income, which means it is taxed at your regular income tax rate — not at a lower capital gains rate. Your tax rate depends on your total income for the year and your filing status, not on the interest amount alone.
If you are in the 22% federal tax bracket and earn $500 in savings interest, you owe roughly $110 in federal tax on that interest (22% of $500). If you are in the 12% bracket, you owe roughly $60. The higher your income, the higher your tax bracket, and the more you owe on the same amount of interest.
This matters most when you move to a high-yield savings account. A high-yield account might pay 4% or 5% annual interest instead of 0.01%, which means much more interest to report and much more tax to owe. Before opening a high-yield account, calculate how much interest you will earn and estimate your tax bill.
State income tax on savings interest
Most states tax savings interest as part of your state income tax return. You report the same interest amount you reported to the IRS on your state return as well. Your state tax rate varies by state — it might be 3%, 5%, 8%, or higher depending on where you live and your income.
A few states do not tax income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe no state tax on your savings interest, though you still owe federal tax.
Some states have special rules for retirement accounts. Interest earned in an IRA or 401(k) is usually not taxed at the state level until you withdraw it, even if the account is held at a bank. Check your state's tax rules if most of your savings are in a retirement account.
When you have to report interest under $10
If you earned less than $10 in interest, your bank does not send you a 1099-INT. You still owe tax on that interest. You report it on your federal return in the "Interest Income" section, usually on Schedule 1 (Form 1040). Write in the amount yourself.
This happens most often with regular savings accounts that pay very little interest, or with accounts you opened late in the year. Keep your bank statements so you can verify the interest amount if the IRS ever asks. The IRS does not have a copy of the interest from a bank that did not file a 1099-INT, so you are responsible for reporting it accurately.
How to report interest on your tax return
On your federal return, you report interest income on Form 1040, Schedule 1, line 8a. If you received a 1099-INT, copy the amount from box 1 of the form. If you earned interest but did not receive a 1099-INT (because it was under $10), write in the amount you calculated from your bank statements.
If you have a spouse filing jointly, combine all interest from both spouses' accounts and report the total. If you file separately, each spouse reports only their own interest.
On your state return, look for the "Interest Income" line and report the same amount. Some states have a separate schedule for interest; others ask for it directly on the main return. Your state tax software or form instructions will show you where to enter it.
Interest in retirement accounts and special cases
Interest earned inside an IRA, 401(k), or other retirement account is not taxed in the year it is earned. The account grows tax-deferred, and you owe tax only when you withdraw money from the account. You do not receive a 1099-INT for interest inside a retirement account, and you do not report it on your tax return.
If you have a savings account in a child's name, the child owes tax on the interest, not the parent. If the child's interest income is low enough, they may not have to file a return, depending on their age and other income. Check IRS rules for dependent filing requirements.
If you earned interest on money held in an estate or trust, the interest may be taxed to the estate or trust rather than to you. This is a complex situation — consult a tax professional if you are the executor or beneficiary of an estate with savings accounts.
Frequently Asked Questions
Do I owe taxes on interest if I did not withdraw the money?
Yes. You owe tax on interest in the year it is credited to your account, whether you withdraw it or leave it in the account. The IRS taxes interest as income when it is earned, not when you spend it.
What if my bank sent me a 1099-INT with the wrong amount?
Contact your bank immediately and ask for a corrected form. The bank will issue a corrected 1099-INT and send it to you and the IRS. Once you receive the corrected form, use that amount on your tax return. If you already filed with the wrong amount, you may need to file an amended return.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. You cannot subtract fees, penalties, or other costs. However, if you paid investment fees or tax preparation fees, you may be able to deduct those separately — consult a tax professional about your specific situation.
Do I have to report interest if I earned less than $10?
Yes. All interest income is taxable, regardless of the amount. If you earned less than $10, your bank does not send a 1099-INT, but you still report the interest on your return. Look at your bank statements to find the exact amount.
Is interest from a money market account taxed the same way as savings account interest?
Yes. Money market accounts, savings accounts, and regular checking accounts all earn interest that is taxed as ordinary income. Your bank reports it on a 1099-INT if it reaches $10, and you report it the same way on your tax return.