Interest income is taxable, and the IRS expects you to report it

Yes, you owe federal income tax on interest your savings account earns. The IRS treats interest as ordinary income, taxed at the same rate as wages or salary. If you earned $10 in interest last year, that $10 is taxable income. If you earned $500, all $500 is taxable. There is no threshold below which interest becomes tax-free — even $1 counts.

Your bank or credit union will report the interest to the IRS on a Form 1099-INT if you earned $10 or more in interest during the tax year. You receive a copy; the IRS receives a copy. You must include that interest on your tax return, whether or not you receive the form. If you earned less than $10, the bank does not have to send a 1099-INT, but you still owe tax on it if you file a return.

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

Key Takeaways

  • All interest earned in a savings account is taxable income, with no minimum threshold — even $1 must be reported.
  • Banks report interest of $10 or more on Form 1099-INT, which goes to both you and the IRS.
  • The tax you owe depends on your tax bracket; interest is taxed as ordinary income at your marginal rate.
  • You can reduce taxable interest by holding money in tax-advantaged accounts like IRAs or 529 plans, depending on your situation.
  • State income tax on interest varies by state; some states do not tax interest income at all.

How the IRS knows about your interest income

Banks are required to report interest to the IRS automatically. If your account earned $10 or more during the calendar year, your bank sends Form 1099-INT to you and to the IRS by January 31 of the following year. The form shows the account number, the bank's name, and the exact amount of interest paid.

The IRS matches the 1099-INT it receives from the bank against your tax return. If you do not report the interest on your return, the IRS will notice the mismatch and may send you a notice or bill for unpaid tax plus penalties. Even if you do not receive a 1099-INT (because interest was under $10), you are still required to report it if you file a return.

Some people think that if interest is small enough, they can skip reporting it. That is not how it works. The IRS has the bank's copy of the 1099-INT, and the amounts are tracked electronically. Unreported interest is one of the easiest things for the IRS to catch.

What tax bracket your interest falls into

Interest income is added to your other income — wages, self-employment income, capital gains — to determine your total taxable income for the year. Your total income then determines which tax bracket you fall into. The tax you pay on interest is the marginal rate of that bracket, not a flat rate.

For example, if you are single and earned $50,000 in wages plus $500 in interest in 2024, your taxable income is $50,500. That $500 in interest is taxed at whatever bracket $50,500 puts you in. If $50,500 falls in the 22% bracket, you owe roughly $110 in federal tax on that interest (22% of $500). If you earned $20,000 in wages and $500 in interest, the same $500 might be taxed at 12%, costing you $60.

The exact brackets change each year and depend on your filing status (single, married filing jointly, head of household, etc.). You can find current brackets on the IRS website or on your tax software.

State income tax on interest varies widely

Federal tax is not the only tax on interest. Most states also tax interest income as part of state income tax. However, the rules differ significantly by state.

Some states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax interest income at all. If you live in one of these states, you owe only federal tax on your savings interest.

Other states tax interest at a flat rate (usually between 3% and 6%), while others tax it as part of their progressive income tax system, similar to federal tax. A few states exempt interest earned on certain types of accounts or below certain thresholds, though these exemptions are uncommon. Check your state's tax authority website or ask a tax professional about the rules in your state.

How to reduce taxable interest through account structure

You cannot avoid paying tax on interest by ignoring it, but you can reduce the amount of interest you earn in taxable accounts in the first place. The main strategy is to hold money in tax-advantaged accounts where interest grows without triggering an annual tax bill.

Traditional IRAs and Roth IRAs allow you to earn interest tax-free within the account. In a traditional IRA, you do not pay tax on the interest until you withdraw money in retirement. In a Roth IRA, you do not pay tax on the interest ever, as long as you follow the withdrawal rules. However, IRAs have contribution limits (currently $7,000 per year for people under 50) and rules about when you can withdraw money.

529 education savings plans allow interest to grow tax-free if the money is used for may have access to education expenses. If you have children or grandchildren, this can be a way to save for tuition without paying tax on the interest.

High-yield savings accounts earn more interest than traditional savings accounts, but the interest is still fully taxable. The higher rate does not change the tax treatment — it just means you have more taxable income.

For most people, the best approach is to keep emergency savings and short-term money in regular or high-yield savings accounts (accepting the tax on interest) and use IRAs or 529 plans for longer-term goals where the tax deferral or exemption makes a real difference.

Reporting interest on your tax return

When you file your federal income tax return, you report interest income on Schedule B (if you have more than $1,500 in interest or dividends) or directly on Form 1040 (if you have $1,500 or less). You list the name of each institution that paid you interest and the amount from the 1099-INT.

If you use tax software, it will usually walk you through entering the 1099-INT information. If you file by paper, you attach Schedule B to your return. The total interest from all accounts goes into your taxable income calculation.

If you earned interest but did not receive a 1099-INT (because it was under $10, or the bank made an error), you still report it. Write in the bank name and the amount you earned based on your own records or statements.

What happens if you do not report interest income

The IRS will eventually notice. Because banks report interest electronically, the IRS has a record of what you earned. If your tax return does not include that interest, the IRS will send you a notice proposing additional tax, plus interest on the unpaid amount and potentially penalties for underpayment.

The penalty for failing to report income is typically 20% of the underpaid tax, though it can be higher if the IRS determines the failure was intentional. Interest accrues on the unpaid tax from the original due date of your return. A small mistake — forgetting $50 in interest — can turn into a bill for $15 to $20 in penalties plus interest, plus the tax itself.

If you discover you did not report interest in a prior year, you can file an amended return (Form 1040-X) to correct it. Filing an amendment voluntarily before the IRS contacts you often results in lower or no penalties.

Frequently Asked Questions

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

Yes. The bank does not have to send you a 1099-INT if interest is under $10, but you still owe tax on it if you file a return. Report it based on your account statements or the interest shown in your online banking portal.

Can I deduct the taxes I pay on interest from my interest income?

No. You report the full amount of interest as income, then calculate your tax based on your bracket. You cannot reduce the interest itself by the tax you owe on it. However, if you paid state income tax, you may be able to deduct it as part of the state and local taxes (SALT) deduction, subject to a $10,000 cap.

What if I have interest in multiple accounts at different banks?

Each bank reports its interest separately on its own 1099-INT. You add up all the interest from all accounts and report the total on your tax return. The IRS receives all the 1099-INTs and expects your return to match the combined total.

Is interest from a money market account taxed differently than interest from a savings account?

No. Interest from money market accounts, certificates of deposit (CDs), and all other deposit accounts is taxed the same way — as ordinary income at your marginal tax rate. The account type does not change the tax treatment.

Do I owe taxes on interest if I reinvest it back into the account?

Yes. It does not matter whether you withdraw the interest or leave it in the account. The moment the bank credits it to your account, it is taxable income. You owe tax on it that year, even if you never touch the money.