Savings account interest is taxable income
Yes. The interest your bank pays you on a savings account is taxable income at the federal level, and in most states at the state level too. The IRS treats it the same way it treats wages or freelance income — money that came to you, so you owe tax on it.
How much tax you pay depends on your total income for the year and your tax bracket. A person in the 22% federal bracket pays roughly 22 cents in federal tax for every dollar of interest earned. Someone in the 12% bracket pays roughly 12 cents per dollar. The exact amount also depends on whether you have other income, deductions, and credits that lower your taxable income.
Your bank will report the interest to you and to the IRS on a Form 1099-INT if you earned $10 or more in interest during the year. Even if you earn less than $10 and don't receive a 1099-INT, you still owe tax on that interest — you just have to report it yourself.
Key Takeaways
- Savings account interest is taxable as ordinary income at both federal and state levels.
- Your bank reports interest of $10 or more on Form 1099-INT, which you receive by January 31.
- You report the interest on your tax return even if you don't receive a 1099-INT, and even if the amount is small.
- High-yield savings accounts earn more interest but also create a larger tax bill in the same year.
- Some savings vehicles like Roth IRAs and 529 plans let interest grow tax-free, though they have contribution limits and rules.
When your bank sends you Form 1099-INT
Your bank will mail or email you a Form 1099-INT by January 31 of the year after you earned the interest. This form shows how much interest you earned in the previous calendar year. You get one copy, and the bank sends a copy to the IRS.
If you have accounts at multiple banks, you may receive multiple 1099-INT forms — one from each institution. You need to add up all the interest from all your forms and report the total on your tax return.
If you earned less than $10 in interest during the year, your bank may not send you a 1099-INT. That does not mean you skip reporting it. You still report any interest you earned, even if it is $1. Look at your account statements from December to see how much interest posted that year.
How to report savings interest on your tax return
You report savings account interest on Schedule B (Form 1040) if your total interest and dividend income is more than $1,500. If it is $1,500 or less, you can report it directly on Form 1040, line 2b, without filing Schedule B.
The process is straightforward: add up all your 1099-INT forms, enter the total on the appropriate line, and that amount becomes part of your taxable income. The IRS matches what you report to what your banks reported on their copies of the 1099-INT, so the numbers need to match.
If you made an error on a previous year's return and reported the wrong amount of interest, you can file an amended return using Form 1040-X. The IRS typically has a three-year window to catch mismatches, so correcting it yourself is better than waiting for them to contact you.
State income tax on savings interest
Most states tax savings account interest as ordinary income, using the same rate they apply to wages. A few states do not have income tax at all — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — so residents of those states owe no state tax on interest.
New Hampshire and Tennessee tax only interest and dividend income, not wages. If you live in one of those states, you report interest on your state return even though you may not owe state tax on your salary.
If you live in a state with income tax, your state tax return will ask for your interest income. Some states use the same amount you reported to the IRS; others have their own forms. Check your state's tax website or your tax software to see what your state requires.
High-yield savings accounts and the tax hit
High-yield savings accounts pay significantly more interest than traditional savings accounts — sometimes 4% to 5% annually, compared to 0.01% at many big banks. That higher rate means more money in your account, but also a larger tax bill in the same year you earn it.
If you have $50,000 in a high-yield account earning 4.5% interest, you will earn $2,250 in interest that year. At a 22% federal tax rate, that is roughly $495 in federal tax owed. At a 5% state rate, that is another $112.50. The after-tax return is real money, but the tax bill arrives when you file your return.
This does not mean high-yield accounts are a bad choice — they still beat inflation and traditional savings accounts. It means you should not be surprised by the tax bill, and you may want to set aside some of the interest to cover taxes rather than spending all of it.
Tax-advantaged savings accounts that avoid interest tax
Some savings vehicles let interest grow without triggering an immediate tax bill. A Roth IRA lets you contribute up to $7,000 per year (for 2024), and all interest and investment gains grow tax-free as long as you follow the withdrawal rules. You cannot touch the money before age 59½ without a penalty, with a few exceptions.
A 529 college savings plan lets you save for education expenses, and interest grows tax-free as long as you use the money for tuition, room and board, books, or other may have access to education costs. If you withdraw money for non-education purposes, you owe tax on the earnings portion plus a 10% penalty.
A Health Savings Account (HSA) works similarly — you can contribute pre-tax money, and interest grows tax-free if you use withdrawals for medical expenses. These accounts have annual contribution limits and may be able to access rules tied to your health insurance.
These options are not available to everyone and come with restrictions, but they are worth considering if you have the income to contribute and the time horizon to follow the rules.
What to do if you did not receive a 1099-INT
If you earned $10 or more in interest but did not receive a 1099-INT by early February, contact your bank. Ask them to send it or confirm that they mailed it to your address on file. If your address changed during the year, the form may have gone to an old address.
If your bank says they sent it and you still cannot find it, ask them for a duplicate or a statement showing the interest earned. You can use that statement to report the interest on your return even without the official 1099-INT form.
Do not skip reporting interest just because you did not receive a 1099-INT. The IRS has a copy from your bank, and if your return does not match, they will send you a notice. Reporting it yourself avoids that problem.
Frequently Asked Questions
Do I owe tax on interest if I earned less than $10?
Yes. The $10 threshold only determines whether your bank sends you a 1099-INT form. You still owe tax on any interest you earned, even $1. Report it on your return based on your account statements.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount your bank paid you. Fees are not deductible against interest income. However, if you paid investment advisory fees or tax preparation fees related to your investments, those may be deductible under certain conditions — check with a tax professional.
What if I moved money between banks during the year?
Each bank reports only the interest earned on money held in their account. If you had $10,000 at Bank A for six months earning $200, then moved it to Bank B for six months earning $200, you will receive two 1099-INT forms showing $200 each. Add them both to your return.
Does interest earned in a joint account get split between owners for tax purposes?
Not automatically. The bank reports the full interest to the Social Security number on file. If the account is truly joint and you each own half, you may need to split the interest on your separate returns. Consult a tax professional if you have a joint account, because the rules depend on how the account was opened and funded.
Is interest from a money market account taxed the same way as savings account interest?
Yes. Money market accounts are treated the same as savings accounts for tax purposes. Your bank reports the interest on Form 1099-INT, and you report it as ordinary income on your tax return.