You owe federal income tax on all interest your savings account earns

Any interest your bank pays you 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. There is no threshold below which interest becomes tax-free; even $1 of interest is technically taxable, though the IRS only requires you to report it if your total interest income crosses certain minimums (usually $10 or more in a year).

Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. This form lists the total interest paid to you and goes to both you and the IRS. You use it to fill out your tax return. If you earned less than $10, your bank may not send a form, but you still owe tax on that interest if you file a return.

The tax you owe depends on your total income and tax bracket for that year. Someone in the 22% tax bracket pays roughly 22 cents in federal tax for every dollar of interest earned. Someone in the 12% bracket pays roughly 12 cents. State income tax may apply on top of that, depending on where you live.

Key Takeaways

  • All savings account interest is taxable income, no matter how small the amount.
  • Your bank sends you a Form 1099-INT if you earned $10 or more in interest during the year, and you report this on your tax return.
  • You pay federal income tax at your ordinary tax rate, plus any applicable state income tax.
  • High-yield savings accounts earn more interest, which means you owe more tax — but the after-tax return is usually still higher than traditional savings accounts.

When the IRS requires you to report interest income

The IRS has a reporting threshold: if you earned $10 or more in interest during the calendar year, your bank must send you a Form 1099-INT by January 31. You then report that interest on your tax return, typically on Schedule 1 (Form 1040) or Schedule B if you have other investment income.

If you earned less than $10, your bank is not required to send a form. However, you are still legally required to report that interest on your tax return if you file one. Many people with small amounts of interest miss this because no form arrives, but the IRS can still assess tax and penalties if they discover unreported income during an audit.

If you have multiple savings accounts at different banks, each bank reports its own interest separately on its own 1099-INT. You add all of them together when you file your return. The total is what matters for your tax liability.

How to calculate your tax liability on interest

Your tax liability on interest depends on your marginal tax rate — the rate you pay on your last dollar of income. For 2024, federal tax brackets range from 10% to 37%, depending on your filing status and total income. If you are single and earn $47,150 to $100,525, you are in the 22% bracket, so you owe roughly 22% of your interest income in federal tax.

To find your bracket, look at your previous year's tax return or use the IRS tax tables published each year. Once you know your rate, multiply your total interest income by that percentage. For example, if you earned $500 in interest and you are in the 22% bracket, you owe about $110 in federal tax on that interest.

State income tax varies widely. New York, California, and most other states tax interest income at their ordinary income tax rates. A handful of states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax income at all, so residents owe no state tax on interest. New Hampshire and Tennessee tax only interest and dividend income, not wages.

High-yield savings accounts and the tax trade-off

A high-yield savings account might pay 4% to 5% annual interest, while a traditional savings account pays 0.01% or less. The higher rate means more interest income — and more tax owed. But even after taxes, you usually come out ahead.

Consider this example: $10,000 in a high-yield account earning 4.5% annually generates $450 in interest. If you are in the 22% federal bracket plus a 5% state bracket (27% combined), you owe $121.50 in tax, leaving you $328.50 after tax. The same $10,000 in a traditional account earning 0.01% generates $1 in interest and $0.27 in tax, leaving you $0.73 after tax. The high-yield account still wins by a wide margin.

The tax does not eliminate the benefit of higher rates — it just reduces it. When comparing savings accounts, look at the after-tax return if you want to know what you actually keep, but the higher rate almost always wins.

What happens if you do not report interest income

The IRS receives a copy of every 1099-INT your bank sends you. If you do not report that interest on your tax return, the IRS will notice the discrepancy during processing. They may send you a notice asking you to file an amended return and pay the tax owed, plus interest on the unpaid amount (currently around 8% annually) and a penalty for underpayment.

The penalty for failing to report income is typically 20% of the unpaid tax, though it can be higher if the IRS determines the failure was intentional. For small amounts of interest, the penalty and interest can exceed the original tax owed. Filing an amended return voluntarily before the IRS contacts you can reduce or eliminate penalties in some cases.

If you earned less than $10 and received no 1099-INT, you are less likely to be caught, but you are still breaking the law if you do not report it. The safest approach is to report all interest income, no matter the amount.

Tax-advantaged alternatives to regular savings accounts

If you want to earn interest without paying tax on it immediately, a few options exist, though they come with restrictions. A Roth IRA lets you earn interest and investment gains tax-free as long as you follow withdrawal rules (you cannot touch the money before age 59½ without penalty, with limited exceptions). A traditional IRA defers taxes until you withdraw the money in retirement.

A 529 college savings plan allows interest and investment gains to grow tax-free if the money is used for may have access to education expenses. A Health Savings Account (HSA) offers tax-free growth if the money is used for medical expenses. These accounts have contribution limits and rules about how you can use the money, so they work best if you have a specific goal in mind.

For money you need to access anytime without restrictions, a regular savings account — even a high-yield one — is usually your only option, and you will owe tax on the interest.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

Legally, yes — all interest income is taxable. Your bank is not required to send a Form 1099-INT if you earned less than $10, but you should still report it on your tax return if you file one. The IRS can assess penalties if they discover unreported income during an audit.

What if I have interest from multiple banks?

Each bank sends its own 1099-INT. You add all the interest together and report the total on your tax return. The combined amount is what determines your tax liability.

Can I deduct interest I earned as a loss?

No. Interest income is taxable income, and you cannot deduct it. You report it as a gain, not a loss. Interest expenses (like mortgage interest) may be deductible, but interest you earn is always taxable.

Do I owe taxes on interest if I am retired?

Yes. Retirement status does not change the tax rules for interest income. You report it on your tax return the same way anyone else does. However, if your total income is low enough, you may not owe federal tax even after including the interest.

What if my bank made a mistake on the 1099-INT?

Contact your bank and ask them to issue a corrected Form 1099-INT (marked as a correction). They will send the corrected version to you and the IRS. File an amended tax return using the correct amount if you already filed.