Interest from your savings account is taxable income

The interest your bank pays you counts as ordinary income on your federal tax return. The IRS treats it the same way it treats wages or salary — you owe income tax on it at your regular rate. Your bank will report the interest to you and to the IRS on a Form 1099-INT if you earned $10 or more in a calendar year, though you may owe tax on smaller amounts too.

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

The bank does not withhold this tax automatically — you pay it when you file your return. This means the full interest amount stays in your account, but you will owe the tax from other money when April comes.

Key Takeaways

  • Interest earned in a savings account is taxed as ordinary income at your federal tax bracket rate, plus any state or local income tax you owe.
  • Your bank sends you a Form 1099-INT and reports the interest to the IRS if you earned $10 or more in the year.
  • You report the interest on your tax return; the bank does not withhold the tax automatically.
  • High-yield savings accounts earn more interest but also create a larger tax bill in the same year.
  • You can reduce taxable interest by holding money in tax-advantaged accounts like IRAs or 529 plans, though those accounts have their own rules and limits.

When the bank sends you a 1099-INT form

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 the total interest paid to you during the previous calendar year. You receive one copy and the IRS receives another.

You must report this amount on your tax return, even if the bank did not send you the form. If you earned interest but did not receive a 1099-INT, contact your bank and ask for one. Do not assume the interest is not taxable just because you did not get a form.

If you have accounts at multiple banks, you will receive multiple 1099-INT forms — one from each institution. You add all the interest together when you file.

How much tax you actually owe on the interest

The federal tax rate on interest is your marginal tax bracket — the rate you pay on your last dollar of income. If you earn $50,000 a year and file single, you are in the 12% bracket, so you owe 12% federal tax on your interest. If you earn $100,000, you are in the 22% bracket, so you owe 22% on the interest.

State and local income tax varies by location. New York State charges between 4% and 8.82% depending on your income. California charges between 1% and 13.3%. Some states like Florida, Texas, and Wyoming charge no state income tax at all. Check your state's tax authority website to find your rate.

The total tax on $1,000 of interest might be $120 in federal tax (12% bracket) plus $60 in state tax (6% rate), for a total of $180. The interest stays in your account, but you owe $180 from other money when you file.

Interest earned in tax-advantaged accounts

Money in a traditional IRA or 401(k) grows without triggering annual income tax on the interest. You pay tax only when you withdraw the money in retirement. A Roth IRA grows tax-free entirely — you pay no tax on the interest or the withdrawals, as long as you follow the withdrawal rules.

A 529 college savings plan lets interest grow tax-free if you use the money for may have access to education expenses. If you withdraw it for other purposes, you owe tax on the interest portion plus a 10% penalty.

These accounts have annual contribution limits and withdrawal restrictions. A traditional IRA allows you to contribute $7,000 per year (or $8,000 if you are 50 or older) as of 2024. A 529 plan has no annual limit, but contributions over $18,000 per year per person may trigger gift tax reporting. Talk to a tax professional before opening these accounts to understand whether they fit your situation.

High-yield savings accounts and the tax bill

A high-yield savings account currently pays 4% to 5% annual interest, compared to 0.01% at many traditional banks. This means you earn more money — but you also owe more tax on it in the same year.

If you have $10,000 in a high-yield account earning 4.5%, you earn $450 in interest. At a 22% federal tax rate plus 6% state tax, you owe $120 in federal tax and $27 in state tax — a total of $147. Your account still holds the full $450, but you need to set aside $147 from other money to pay the tax bill.

This is not a reason to avoid high-yield accounts — the interest you keep after tax is still more than you would earn elsewhere. But it is a reason to plan for the tax bill and not assume all the interest is yours to spend.

Reporting interest on your tax return

If you file Form 1040 (the standard federal tax form), you report interest income on Schedule 1, line 8. If your total interest from all sources is $1,500 or less and you have no other investment income, you can report it directly on line 8 of Form 1040 without filing Schedule 1.

Add up all the 1099-INT forms from every bank and report the total. The IRS computer matches this number to the copies the banks sent, so accuracy matters.

If you file state taxes, your state form will have a line for interest income as well. The amount is usually the same as what you report federally, though some states have different rules for certain types of interest.

What happens if you do not report the interest

The IRS receives a copy of every 1099-INT your bank sends. If you do not report the interest on your return, the IRS will notice the discrepancy. You will receive a notice asking you to explain the difference, and you will owe the tax plus interest on the unpaid amount.

The IRS charges interest on unpaid taxes — currently around 8% per year, though the rate changes quarterly. If you owed $147 in tax and did not pay it for two years, you would owe roughly $24 in interest on top of the original $147.

Penalties for not reporting income can add another 20% to 75% of the unpaid tax, depending on whether the IRS considers it negligence or fraud. It is far simpler to report the interest when you file.

Frequently Asked Questions

Do I owe tax on interest if I earned less than $10?

Your bank will not send you a 1099-INT if you earned less than $10, but you still owe tax on any interest you earned. Report it on your return even if you did not receive a form. The $10 threshold is just when the bank is required to send the form, not when the interest becomes taxable.

Can I deduct savings account interest as a loss?

No. Interest income is taxable, but you cannot deduct it as a loss. You report the full amount as income. The only way to reduce the tax is to earn less interest (by keeping less money in savings) or to move money into tax-advantaged accounts with contribution limits and withdrawal rules.

What if I have interest from a joint account?

The bank reports the full interest amount on a single 1099-INT. You and the other account holder must decide how to split it for tax purposes — usually 50/50 if you own the account equally. Each person reports their share on their own tax return. Coordinate with the other owner so you do not both report the full amount.

Do I owe tax on interest if I moved the money before the year ended?

Yes. You owe tax on all interest earned during the calendar year, regardless of when you withdraw the money. If you earned $500 in interest between January and June and then closed the account, you still report the $500 on your tax return and owe tax on it.

Is interest from a money market account taxed the same way?

Yes. Money market accounts, savings accounts, and certificates of deposit (CDs) all earn interest that is taxed as ordinary income. Your bank reports it on a 1099-INT the same way. The tax treatment is identical; only the interest rate and account features differ.