Interest on savings accounts is taxed as ordinary income at your federal tax rate, plus state and local taxes if your state has an income tax

The interest your bank pays you counts as income to the IRS. You report it on your tax return the same way you'd report wages or salary — it's taxed at whatever your ordinary income tax bracket is, not at a special lower rate. If you earn $500 in savings interest and you're in the 22% federal tax bracket, you owe roughly $110 in federal tax on that interest alone. State and local income taxes apply on top of that if you live in a state that taxes income.

Your bank reports the interest to the IRS on a Form 1099-INT if you earned $10 or more in a calendar year. You receive a copy in January or early February. The IRS gets a copy too, so they know what you earned. If you don't report it on your tax return and the amounts don't match, the IRS will notice.

The tax is due when you file your return for that tax year, even though you may not have received the 1099-INT yet. If you owe federal income tax, you typically file by April 15 of the following year.

Key Takeaways

  • Savings interest is taxed as ordinary income at your full federal tax rate, not at a reduced rate.
  • Banks report interest of $10 or more on Form 1099-INT, which goes to both you and the IRS.
  • You must report all interest income on your tax return, even if you don't receive a 1099-INT.
  • State and local income taxes also apply to savings interest in most states.
  • The tax is owed in the year you earn the interest, regardless of when you withdraw the money.

When you receive a 1099-INT and what it means

A Form 1099-INT is a record of interest paid to you during the calendar year. Your bank sends it to you and files it with the IRS. You'll receive it by January 31 if you earned $10 or more in interest during the previous year. If you earned less than $10, the bank may not send you a form, but you still owe tax on that interest.

The form shows the total interest earned, broken down by account if you have multiple accounts at the same bank. It also shows any interest that was withheld (which is rare for savings accounts but can happen in other situations). Keep this form with your tax records — you'll need it when you file.

If you don't receive a 1099-INT but you know you earned interest, contact your bank and ask for one. If the bank can't provide it, you can still report the interest yourself based on your account statements.

How your tax bracket determines what you actually owe

The amount of tax you pay on savings interest depends on your total income for the year and your filing status. The IRS uses tax brackets — ranges of income that are taxed at different rates. In 2024, federal tax brackets range from 10% to 37%, depending on how much total income you have.

If you earn $500 in savings interest and your total income puts you in the 12% bracket, you'll owe roughly $60 in federal tax on that interest. If your total income puts you in the 24% bracket, you'll owe roughly $120. The interest itself doesn't change, but the tax you owe on it does, based on your other income.

This is why someone with a high salary pays more tax on the same amount of interest than someone with a lower salary. Your savings interest is added to your other income, and the combined total determines your tax rate.

State and local taxes on savings interest

Most states that have an income tax also tax savings interest at your state tax rate. A few states do not tax interest income at all — currently, Alaska, Florida, Illinois, Mississippi, Missouri, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. If you live in one of these states, you only owe federal tax on your savings interest.

If you live in a state with an income tax, your state tax rate is usually lower than your federal rate. For example, if your state income tax rate is 5% and you earn $500 in interest, you'd owe roughly $25 in state tax on top of your federal tax. Some cities and counties also tax income, though this is less common.

Check your state's tax authority website or your most recent state tax return to find your state tax rate. You'll report the same interest income on both your federal and state returns.

Interest earned in joint accounts and how it's taxed

If you own a savings account jointly with another person, the interest earned belongs to whoever owns the account, based on your account agreement. In most cases, the bank reports all the interest to the IRS under one person's Social Security number — usually whoever is listed first on the account or whoever the account was opened under.

You and the other account owner need to decide how to split the tax responsibility. If the interest is reported under your name but you only own half the account, you may need to file an amended return or work out the tax split with the other owner. This is a matter between you and the other owner; the IRS will expect the person whose name is on the 1099-INT to report it.

If you have questions about how the interest should be split, ask your bank which person's name the 1099-INT will be issued under before the end of the year. That way you can plan accordingly.

What happens if you don't report savings interest on your taxes

The IRS receives a copy of every 1099-INT your bank files. If you don't report the interest on your tax return and the amount is significant, the IRS will likely catch the discrepancy through automated matching. You may receive a notice asking you to pay the tax you owe, plus penalties and interest on the unpaid amount.

The penalty for not reporting income is usually 20% of the underpaid tax, though it can be lower if you have a reasonable cause for the error. Interest accrues on the unpaid tax from the original due date until you pay. If the IRS determines the omission was intentional, the penalty can be higher.

If you realize you missed reporting interest from a prior year, you can file an amended return using Form 1040-X. It's better to correct the error yourself than to wait for the IRS to contact you.

High-yield savings accounts and tax implications

High-yield savings accounts pay significantly more interest than traditional savings accounts — sometimes 4% to 5% APY compared to 0.01% at a typical bank. This means you'll earn more interest and owe more tax on it. The tax treatment is identical: all the interest is taxed as ordinary income at your full tax rate.

If you earn $2,000 in interest from a high-yield account and you're in the 22% federal bracket, you'll owe roughly $440 in federal tax on that interest. This is still usually worth it — you're earning far more interest than you would at a traditional bank — but it's important to factor the tax into your planning.

Some people move money between high-yield accounts to chase the best rates. Each account will generate its own interest and its own 1099-INT. You report all of it on your tax return.

Frequently Asked Questions

Do I owe taxes on interest if I don't withdraw the money?

Yes. You owe tax on interest in the year it's earned, even if it stays in the account and compounds. The IRS taxes interest when it's credited to your account, not when you withdraw it. If you leave interest in the account, it will earn interest next year, and you'll owe tax on that too.

What if I earned interest but didn't get a 1099-INT?

You still owe tax on it. Banks are only required to send a 1099-INT if you earned $10 or more. If you earned less, report the interest based on your account statements. If you earned $10 or more and didn't receive a form, contact your bank and request one.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount on your taxes. Account fees are not deductible against interest income. However, if you have significant investment expenses, you may be able to deduct them separately, though the rules are strict and most people don't benefit.

How do I report interest if I have accounts at multiple banks?

Each bank sends you a separate 1099-INT. You add up all the interest from all the forms and report the total on your tax return. The IRS receives copies of all the forms too, so make sure your total matches.

Is there a way to avoid paying tax on savings interest?

No, but you can reduce the amount of interest you earn by keeping money in lower-yield accounts. You could also put money in tax-advantaged accounts like a Roth IRA or 529 plan, where interest grows tax-free, though these have contribution limits and withdrawal rules. For most people, the tax on savings interest is simply part of the cost of earning that interest.