Yes, you owe federal income tax on savings account interest
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 report it on your tax return and pay income tax on it at your ordinary tax rate. This applies to all savings accounts: regular savings, money market accounts, and certificates of deposit (CDs).
Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. You use this form to report the interest on your federal tax return. Some states also tax savings interest, though a few states exempt it entirely.
The amount of tax you owe depends on your total income and your tax bracket, not on the interest amount itself. Someone in the 22% tax bracket pays more tax on the same $100 of interest than someone in the 12% bracket.
Key Takeaways
- Savings account interest is taxable income at the federal level and must be reported on your tax return.
- Your bank sends you a Form 1099-INT if you earned $10 or more in interest during the year.
- The tax rate you pay on interest depends on your overall income and tax bracket, not the interest amount alone.
- Some states do not tax savings interest, while others tax it as regular income — check your state's rules.
- High-yield savings accounts earn more interest but also create a larger tax bill in the same year.
When the bank reports your interest to the IRS
Banks are required to report interest earnings to both you and the IRS using Form 1099-INT. You receive a copy by January 31 of the year following the one in which you earned the interest. For example, interest you earned in 2024 appears on a 1099-INT you receive in January 2025.
The $10 threshold means your bank only sends a 1099-INT if your total interest for the year reached $10. However, you still owe tax on interest below $10 — you just have to report it yourself without receiving a form. If you had multiple accounts at different banks, each bank sends its own 1099-INT, and you add all the interest together on your return.
The IRS receives a copy of every 1099-INT your bank files, so they know how much interest you earned. Failing to report it on your return creates a mismatch that can trigger an audit notice.
How your tax bracket affects what you owe
The tax you pay on savings interest is not a flat percentage — it depends on your tax bracket. If you are single and earned $47,150 in 2024, you fall into the 22% tax bracket. That means each additional dollar of income, including interest, is taxed at 22%. If you earned $11,600 in interest, you would owe roughly $2,552 in federal tax on that interest alone.
Someone in the 12% bracket pays less tax on the same $11,600 of interest. Someone in the 35% bracket pays more. Your interest stacks on top of your other income — wages, self-employment earnings, capital gains — to determine which bracket you land in.
This is why high-yield savings accounts, which pay 4% to 5% interest, can create a surprisingly large tax bill. A $50,000 balance earning 4.5% generates $2,250 in interest. In the 22% bracket, that costs you about $495 in federal tax.
State taxes on savings interest vary widely
Nine states do not tax income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (though New Hampshire taxes interest and dividends specifically). If you live in one of these states, you owe no state income tax on your savings interest.
Most other states tax savings interest as regular income at their state tax rate. State rates range from roughly 1% to over 13%, depending on the state and your income level. A few states offer partial exemptions — for example, some allow a small amount of interest income to go untaxed, or exempt interest earned by people over a certain age.
You report state interest income on your state tax return using the same 1099-INT your bank sent you. Your state tax return asks for total interest income, and you pay tax at your state's rate.
What happens if you do not report interest income
The IRS matches 1099-INT forms filed by banks against the income reported on tax returns. If your return shows no interest income but your bank reported $500 to the IRS, you will likely receive a notice asking you to explain the difference. The IRS may assess additional tax, plus interest and penalties.
Penalties for underreporting income start at 20% of the underpaid tax. If the underreporting is deemed fraudulent rather than accidental, the penalty rises to 75%. Interest accrues on unpaid tax from the original due date until you pay.
Reporting interest you earned is straightforward and costs nothing. Not reporting it creates a debt that grows over time and can result in collection action.
Strategies to reduce the tax impact of savings interest
You cannot avoid tax on savings interest, but you can reduce how much interest you earn in taxable accounts. One option is to hold savings in a Roth IRA or Roth 401(k), where interest and growth are tax-free as long as you follow withdrawal rules. Contributions to these accounts are limited — $7,000 per year for IRAs in 2024, or more if you are over 50 — but the tax savings can be substantial over time.
Another approach is to use a 529 college savings plan if you are saving for education. Interest earned in a 529 is tax-free when used for may have access to education expenses. Some states also offer state income tax deductions for 529 contributions.
For money you need to keep in a regular savings account, there is no tax reduction available. You earn interest and report it. The only way to lower your tax bill is to earn less interest, which means keeping less money in savings or choosing a lower-yield account — a trade-off most people do not want to make.
How to report savings interest on your tax return
When you file your federal return, you report interest income on Schedule 1 (Form 1040), line 8. If you received a 1099-INT, copy the amount from box 1 of the form. If you earned interest below $10 and did not receive a 1099-INT, you still report it — add up all interest from all accounts and enter the total.
The interest amount flows into your total income, which determines your tax bracket and overall tax bill. You do not pay tax on interest separately; it combines with your other income.
For state returns, follow your state's instructions. Most states have a line for interest income on their income tax form. Use the same 1099-INT amount you reported to the IRS.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. The $10 threshold only determines whether your bank sends you a 1099-INT. You still owe tax on all interest you earned, even if it is $5. You report it on your return without a form.
What if I have savings accounts at multiple banks?
Each bank sends its own 1099-INT if you earned $10 or more at that bank. Add all the interest amounts together and report the total on your tax return. The IRS receives all the forms and knows your total interest income.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount the bank paid you. Account fees are not deductible against interest income on your federal return, though some states allow limited deductions for investment-related fees.
Is interest from a money market account taxed differently than a savings account?
No. Money market accounts, savings accounts, and CDs are all taxed the same way — the interest is ordinary income taxed at your regular rate. Your bank reports it on a 1099-INT.
What if my bank made an error on the 1099-INT?
Contact your bank and ask for a corrected form (Form 1099-INT with a "Corrected" box checked). The bank will file the corrected version with the IRS and send you a copy. Report the corrected amount on your tax return.