You pay tax on the interest your savings account earns, not on the account balance itself
The money sitting in your savings account is not taxed. The interest that account earns is taxed as ordinary income by the IRS. If your savings account earned $50 in interest last year, you owe federal income tax on that $50. The $5,000 principal you deposited stays yours without a tax hit.
Banks and credit unions report this interest to you and to the IRS on a Form 1099-INT each January. The threshold for receiving a 1099-INT varies by institution — some banks report all interest, others only report if you earned $10 or more. Either way, you owe tax on all interest you earned, whether or not you receive a form.
The tax rate depends on your total income and filing status. Interest counts as ordinary income, so it is taxed at your regular income tax bracket, which ranges from 10% to 37% at the federal level. Some states also tax interest income. The amount of tax you owe is determined when you file your tax return, not when the interest hits your account.
Key Takeaways
- Interest earned in a savings account is taxed as ordinary income; the principal balance itself is never taxed.
- Banks report interest of $10 or more on Form 1099-INT, which you receive by January 31 and the IRS receives at the same time.
- You owe federal income tax at your regular bracket rate plus any applicable state income tax on all interest earned, regardless of whether you receive a 1099-INT.
- High-yield savings accounts earn more interest and therefore generate a larger tax bill, even though the tax rate itself does not change.
How the IRS learns about your savings interest
Your bank sends Form 1099-INT to both you and the IRS. You receive your copy by January 31 of the year following the one in which you earned the interest. The IRS receives its copy at the same time. The form shows the account number, the bank's name, and the total interest paid during the calendar year.
The IRS matches the 1099-INT it receives from your bank against the income you report on your tax return. If you earned $75 in interest but do not report it, the IRS will likely catch the discrepancy. Intentionally hiding interest income is tax evasion and can result in penalties, interest charges, and criminal prosecution in severe cases.
Some banks do not issue a 1099-INT if interest falls below their reporting threshold, often $10. However, you still owe tax on that interest. If you earned $8 in interest and received no form, you must still report it on your return. The absence of a form does not erase the tax obligation.
Where to report savings interest on your tax return
Interest income goes on Schedule B (Interest and Ordinary Dividends) if you use the long form, or directly on Form 1040 if you use the short form. Most tax software will prompt you to enter this information. If you received a 1099-INT, you will enter the amount shown in Box 1 of that form.
If you have multiple savings accounts at different banks, you add up all the interest from all accounts and report the total. You do not need to list each account separately unless you are filing Schedule B, in which case you list each 1099-INT you received.
The interest is added to your other income to determine your tax bracket and your total tax bill. It does not get a special rate or deduction — it is treated the same as wages or salary for tax purposes.
High-yield savings accounts and tax consequences
A high-yield savings account earns significantly more interest than a traditional savings account — sometimes 4% to 5% annually compared to 0.01% or less at a regular bank. That higher interest means a larger amount to report and a larger tax bill. A $10,000 deposit earning 4.5% generates $450 in taxable interest; the same deposit at 0.01% generates $1 in taxable interest.
The tax rate itself does not change based on the account type. You still pay your ordinary income tax rate on the interest. But because high-yield accounts generate more interest, they generate more tax liability. This is one reason some people keep emergency funds in high-yield accounts despite the tax cost — the after-tax return is still higher than a traditional savings account.
Money market accounts and certificates of deposit (CDs) work the same way: all interest is taxable and reported on Form 1099-INT. A CD that matures and pays $200 in interest means you owe tax on that $200, even if you immediately roll the money into a new CD.
State income tax on savings interest
Most states that have an income tax also tax interest income. The state tax rate varies widely — from less than 1% to over 10% depending on your state and income level. A few states do not tax interest: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax at all.
If you live in a state with income tax, you will report your interest income on your state return as well as your federal return. Some states use the same 1099-INT information you report to the IRS; others require you to file a separate state interest income form. Your state tax return instructions will specify where to report it.
If you moved during the year or worked in a state different from where you live, the rules become more complex. Generally you owe tax to the state where you lived when you earned the interest, but some states have reciprocal agreements. A tax professional or your state's revenue department can clarify your specific situation.
What happens if you do not report savings interest
The IRS receives a copy of every 1099-INT your bank sends you. When you file your return, the IRS compares the income you reported against the 1099-INTs in its system. If you earned $100 in interest and reported nothing, the IRS will send you a notice demanding payment of the tax owed plus penalties and interest.
The penalty for underreporting income is typically 20% of the underpaid tax. Interest accrues on the unpaid tax at a rate set quarterly by the IRS — currently around 8% annually. If the underreporting was intentional, criminal penalties can apply, though the IRS usually pursues civil remedies first.
If you simply forgot to report small amounts of interest, the IRS may send a notice and a bill. If you have a pattern of underreporting or if the amount is large, the IRS may audit your return. The safest approach is to report all interest, even amounts under $10 where no 1099-INT was issued.
Strategies to reduce taxable interest income
You cannot avoid the tax on interest you earn, but you can reduce the amount of interest you earn. Moving money from a high-yield savings account to a money market fund or short-term bond fund may generate lower taxable income, though those investments carry different risks. Some people keep only an emergency fund in a savings account and invest longer-term money elsewhere.
Tax-advantaged accounts like IRAs and 401(k)s allow interest to grow without annual tax. Interest earned inside a traditional IRA is not taxed until you withdraw it in retirement. Interest in a Roth IRA is never taxed. If you have earned income, you can contribute to an IRA and defer or eliminate tax on some of your savings interest.
Another option is a Series I savings bond, which earns interest that is not taxed federally until you cash it in — potentially decades later. These bonds are issued by the U.S. Treasury and have specific rules about purchase limits and holding periods, but they can be useful for long-term savings where you want to defer tax.
Frequently Asked Questions
Do I owe tax on savings interest if I earned less than $10?
Yes. Your bank may not send you a 1099-INT if interest falls below $10, but you still owe federal income tax on all interest earned. You must report it on your tax return. The absence of a form does not erase the tax obligation.
What if I have savings accounts at multiple banks?
Add up the interest from all accounts and report the total on your tax return. If each bank sends you a 1099-INT, you will receive multiple forms. You report the combined total, not each form separately, unless you are filing Schedule B.
Can I deduct savings account fees from the interest I report?
No. You report the gross interest shown on the 1099-INT, not the net after fees. If your bank charged you a $5 monthly fee, you still report the full interest amount. The fee is a separate expense that may be deductible in limited circumstances, but it does not reduce your interest income.
Is interest from a joint savings account split between owners for tax purposes?
Not automatically. 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 and want to split the tax burden, you will need to file amended returns or work with a tax professional to report it correctly.
Do I owe tax on interest if I withdrew the money before the year ended?
Yes. You owe tax on all interest earned during the calendar year, regardless of when you withdrew the principal. If you opened a savings account on December 1 and earned $5 in interest before closing it on December 15, you owe tax on that $5.