The tax rate on savings account interest depends on your total income and tax bracket

Interest earned in a savings account is taxed as ordinary income, meaning it uses the same tax rates as your wages or salary. The federal tax rate you pay ranges from 10% to 37%, depending on how much total income you made that year. Your bank does not withhold tax automatically—you owe it when you file your return, unless the interest is large enough that your bank withholds it under backup withholding rules.

Most savings accounts earn so little interest that the tax is negligible. A $10,000 balance earning 4% annually generates $400 in interest; if you are in the 22% tax bracket, you owe $88 in federal tax on that. But if you have $100,000 or more in savings, or if you hold certificates of deposit (CDs) or money market accounts, the interest can be substantial enough to matter.

Your state may also tax savings interest. Some states tax it at your regular income tax rate; others exempt it for residents over a certain age or with income below a threshold. A few states do not tax interest income at all.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax bracket rate, which ranges from 10% to 37% depending on your total income for the year.
  • Your bank reports interest of $10 or more on a Form 1099-INT, and you report it on your tax return even if the bank does not withhold tax.
  • State tax on savings interest varies by state—some states tax it fully, some exempt it for certain ages or income levels, and a handful do not tax it at all.
  • You can reduce taxable interest by holding savings in tax-advantaged accounts like Roth IRAs or 529 plans, where interest grows tax-free.

How your tax bracket determines the rate you pay

The federal tax code uses tax brackets—income ranges where a specific percentage rate applies. For 2024, the brackets for single filers range from 10% on the first $11,600 of income to 37% on income over $578,100. If you are married filing jointly, the ranges are wider.

Your savings interest gets added to your other income for the year. If you earned $50,000 in wages and $500 in savings interest, your taxable income is $50,500. The interest does not push you into a higher bracket by itself—it is taxed at whatever bracket your total income falls into. If your total income of $50,500 puts you in the 22% bracket, you pay 22% federal tax on that $500 interest, or $110.

The brackets change each year. The IRS adjusts them for inflation, so the income ranges that trigger each rate shift slightly upward annually. This means the same dollar amount of interest may be taxed at a different rate from year to year depending on your total income.

What your bank reports and when you report it

Banks report interest of $10 or more on a Form 1099-INT, which they mail to you by January 31 and file with the IRS. The form shows the total interest you earned at that bank during the year. If you have accounts at multiple banks, you receive a separate 1099-INT from each one.

You must report all interest income on your tax return, even if you did not receive a 1099-INT (for example, if interest was under $10, or if the bank made an error). The IRS receives a copy of every 1099-INT your banks file, so mismatches between what you report and what they report trigger an audit notice.

Interest is reported on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest and dividends combined. If you have less, you can report it directly on your Form 1040. The total then flows to your taxable income calculation.

State taxes on savings interest vary widely

Federal tax is only part of the picture. Your state may tax savings interest at your regular state income tax rate, which ranges from 0% to over 13% depending on the state. Some states offer partial exemptions for residents over age 59½ or 65, or for low-income households.

A handful of states do not tax interest income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. New Hampshire and Tennessee tax only interest and dividends, not wages. If you live in one of these states, you owe only federal tax on your savings interest.

States that do tax interest often require you to report it on your state return separately from federal. Some states use your federal taxable income as a starting point and then add back certain deductions; others calculate state tax independently. Check your state's tax authority website or your state return instructions to see how interest is treated.

When your bank withholds tax automatically

Banks do not routinely withhold federal income tax on savings interest. However, backup withholding can apply if you do not provide a valid Social Security number or tax ID, or if the IRS notifies your bank that you underreported interest in the past. When backup withholding is in effect, the bank withholds 24% of the interest and sends it to the IRS.

If backup withholding applies to your account, your 1099-INT will show the amount withheld. You can claim that withholding as a credit against your tax bill when you file your return. Backup withholding is rare for most savers; it typically affects people who have had prior tax compliance issues.

Some banks offer the option to have tax withheld voluntarily, though most do not promote this. If you want to have tax withheld to avoid owing a large amount at tax time, contact your bank directly to ask whether they support voluntary withholding.

Tax-advantaged accounts that avoid or defer tax on interest

If you want to earn interest without paying tax on it immediately, you can use certain accounts. A Roth IRA or Roth 401(k) allows interest to grow tax-free, and you pay no tax when you withdraw it in retirement (provided you meet age and holding-period rules). A traditional IRA or 401(k) defers tax until you withdraw the money.

A 529 college savings plan lets interest grow tax-free if you use the money for may have access to education expenses. A Health Savings Account (HSA) offers tax-free growth if you use withdrawals for medical costs. Money held in these accounts earns interest just like a regular savings account, but the tax treatment is much more favorable.

These accounts have contribution limits and withdrawal restrictions, so they are not a fit for all savings. But if you have money you plan to hold for retirement or education, moving it into one of these accounts can save you hundreds or thousands in taxes over time.

Frequently Asked Questions

Do I have to pay tax on interest if I earned less than $10?

Your bank does not have to report interest under $10 on a 1099-INT, but you still owe tax on it if you are required to file a return. Report all interest income on your tax return, even amounts under $10.

What if I have interest from multiple banks?

Each bank sends a separate 1099-INT. Add up the interest from all of them and report the total on your tax return. The IRS receives copies of all your 1099-INTs, so they will know if you miss any.

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 for most taxpayers. Report gross interest, not interest minus fees.

Does interest from a CD get taxed differently than a savings account?

No. Interest from a CD is taxed the same way as savings account interest—as ordinary income at your tax bracket rate. The bank reports it on a 1099-INT just like savings interest.

What if I moved money between banks during the year?

Each bank reports only the interest earned on money held at that bank. If you moved $5,000 from Bank A to Bank B in June, Bank A reports interest earned January through May, and Bank B reports interest earned June through December. Add both 1099-INTs together on your return.