Interest from your savings account counts as taxable income
Yes. The interest your bank pays you on a savings account is ordinary income, and you owe federal income tax on it. Your state may tax it too. The bank reports this interest to the IRS on a Form 1099-INT, and you report it on your tax return. The amount matters less than you might think—even $10 in interest creates a tax obligation, though the actual tax you owe depends on your total income and tax bracket.
The tax applies whether you leave the money in the account or withdraw it. You pay tax on interest in the year it posts to your account, not when you touch the money. If your bank paid you $47 in interest during 2024, you owe tax on $47 in 2024, even if you never withdrew a cent.
Key Takeaways
- Banks report savings account interest to the IRS on Form 1099-INT, and you must report it as income on your tax return.
- You owe tax on interest the year it is credited to your account, regardless of whether you withdraw the money.
- The tax you owe depends on your total income and tax bracket, not just the interest amount.
- If you earned less than $1,200 in interest during the year, the bank may not send you a 1099-INT, but you still owe tax on it.
- High-yield savings accounts pay more interest, which means a larger tax bill—a trade-off to consider when choosing where to keep your money.
How the IRS finds out about your interest
Your bank sends a Form 1099-INT to both you and the IRS each January, reporting all interest paid to your account during the previous year. The threshold for sending this form is $10 or more in interest, though some banks send it anyway if you earned any interest at all. Even if your bank does not send you a 1099-INT because the amount was under $10, you still owe tax on that interest.
The IRS cross-checks the 1099-INT against your tax return. If you do not report the interest, the IRS will notice the discrepancy. This is one of the easiest catches for the IRS because the bank reports it automatically—there is no guesswork involved.
What tax rate applies to your interest
Interest is taxed as ordinary income, meaning it is added to your wages, self-employment income, and any other income you earned that year. Your total income determines which tax bracket you fall into, and that bracket determines your rate. If you earned $50,000 in wages and $500 in interest, you pay tax on $50,500 total.
For 2024, federal tax brackets range from 10% to 37% depending on your income and filing status. A person in the 22% bracket who earned $300 in savings interest would owe roughly $66 in federal tax on that interest alone. State income tax, where it exists, applies on top of federal tax. Some states tax interest at your regular income rate; others have a separate rate for investment income.
The actual tax you owe also depends on whether you take the standard deduction or itemize deductions, whether you have dependents, and whether you have other credits. The interest itself is straightforward—it is income—but the total tax bill requires looking at your whole financial picture.
High-yield savings accounts and the tax trade-off
High-yield savings accounts pay 4% to 5% APY, compared to 0.01% or less at traditional banks. That higher rate means more interest—and a bigger tax bill. A $10,000 balance earning 4.5% APY generates $450 in annual interest, all taxable. The same $10,000 at 0.01% generates $1 in interest.
This is not a reason to avoid high-yield accounts. You still come out ahead: earning $450 and paying $99 in federal tax (at 22%) leaves you with $351 in real gain. Earning $1 and paying $0.22 in tax leaves you with $0.78. The higher rate wins even after taxes. But it is worth knowing that moving money to a higher-yield account will increase your tax liability that year.
When you might owe tax but receive no 1099-INT
If you earned less than $10 in interest during the year, your bank may not send you a Form 1099-INT. This does not mean you owe no tax. You still report the interest on your return, even if you have to calculate it yourself from your account statements. The IRS expects you to report all income, regardless of whether a third party reported it.
This situation is common with savings accounts at traditional banks, which pay so little interest that many customers fall below the $10 threshold. If you have multiple accounts, add up the interest from all of them. You might have $3 from one bank, $4 from another, and $5 from a third—totaling $12, which crosses the threshold and triggers a 1099-INT from at least one of them.
How to report interest on your tax return
On your federal return, you report interest income on Schedule B (Interest and Ordinary Dividends) if your interest and dividends total more than $1,500. If they are $1,500 or less, you can report the total directly on Form 1040 without filing Schedule B. Either way, the interest goes into the same income category as wages and self-employment income.
When you file, you will need the 1099-INT from your bank, or your own record of the interest if no form was issued. The form shows the account holder's name, the bank's name, and the interest amount. If you have multiple accounts at the same bank, the bank may issue one 1099-INT combining all of them, or separate forms for each account—this varies by institution.
State tax returns work the same way. Most states that have income tax require you to report interest as ordinary income. A few states, like Pennsylvania and New Hampshire, do not tax interest income at all, which is one reason some people keep savings accounts in those states—though you still owe federal tax.
Interest from CDs and money market accounts
Certificates of Deposit (CDs) and money market accounts follow the same tax rules as savings accounts. The interest is taxable in the year it is credited, even if the CD has not matured yet. If you buy a 12-month CD in November 2024 that pays interest monthly, you owe tax on each month's interest in 2024, not when the CD matures in 2025.
This matters most with CDs that pay interest at maturity rather than monthly. If you buy a one-year CD in December 2024 that pays all interest on December 15, 2025, you owe tax on that interest in 2025, not 2024. The year the interest is credited is the year you report it, regardless of when you opened the account or when it matures.
Frequently Asked Questions
Do I owe tax on interest if I do not withdraw the money?
Yes. Tax is owed on interest the year it is credited to your account, whether you withdraw it or leave it there. The IRS taxes the interest itself, not the withdrawal of money.
What if I earned interest in multiple accounts at different banks?
Add up all the interest from all accounts. Each bank reports its own interest on a separate 1099-INT, but you combine them all on your tax return as one line item of interest income. The total determines your tax bracket and your tax bill.
Can I deduct the taxes I pay on savings interest?
No. Interest income is taxable, and you cannot deduct the tax you pay on it. You report the full interest amount as income and pay tax at your marginal rate. There is no offsetting deduction.
What happens if my bank does not send me a 1099-INT?
You still owe tax on the interest. If the amount was under $10, the bank may not be required to send a form, but you must report it yourself using your account statements. The IRS expects all income to be reported, with or without a 1099-INT.
Is interest taxed differently if I am retired?
No. Interest is taxed as ordinary income regardless of your age or employment status. However, if your total income is low enough, you may owe no federal tax at all due to the standard deduction. State taxes may also differ based on age in some states.