All interest your savings account earns is taxable income

Every dollar of interest your bank pays you counts as taxable income on your federal tax return. There is no threshold—not $1, not $100. The IRS taxes interest from the moment it hits your account, whether you withdraw it or leave it to compound.

Your bank will send you a Form 1099-INT in January if you earned $10 or more in interest during the previous year. You report this amount on your tax return even if you don't receive the form (though you should). If you earned less than $10, the bank typically doesn't issue a 1099-INT, but the interest is still taxable—you just report it yourself.

The tax rate depends on your overall income and tax bracket. Interest is treated as ordinary income, not capital gains, so it's taxed at your regular income tax rate, which ranges from 10% to 37% federally depending on how much you earn. Your state may also tax it.

Key Takeaways

  • All savings account interest is taxable income, regardless of the amount, and you report it on your federal tax return.
  • Banks send Form 1099-INT when interest reaches $10 or more, but you must report interest below that threshold yourself.
  • Interest is taxed as ordinary income at your marginal tax rate, which can range from 10% to 37% federally plus any state income tax.
  • High-yield savings accounts earn more interest, which means higher taxable income—calculate the after-tax return before opening one.
  • You can reduce taxable interest by holding savings in tax-advantaged accounts like IRAs or 529 plans, depending on your situation.

When the bank sends you Form 1099-INT

Your bank is required to issue a Form 1099-INT if you earned $10 or more in interest during the calendar year. The form arrives by January 31 and shows the total interest paid to you. The bank sends a copy to you and a copy to the IRS.

If you earned less than $10, the bank does not send a 1099-INT. However, you still owe tax on that interest. You report it on your return even without the form. The IRS has records of your account and knows you earned interest; the $10 threshold is just when the bank must formally report it.

If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add all the interest together when you file. If you moved money between banks mid-year or closed an account, make sure you receive a 1099-INT from each institution where you held money.

How your tax bracket determines what you pay

Interest income is added to your other income (wages, self-employment, capital gains, etc.) to determine your total taxable income. Your tax bracket then applies to that total. If you earn $50,000 in wages and $500 in interest, you owe tax on $50,500.

For 2024, federal tax brackets for single filers range from 10% on the first $11,600 of income to 37% on income over $578,100. If you fall in the 22% bracket, that $500 in interest costs you roughly $110 in federal tax. Add state income tax (which varies from 0% to over 13% depending on where you live), and your actual cost rises.

The higher your income, the higher your marginal rate—the rate applied to your last dollar earned. Someone in the 35% bracket pays 35 cents in federal tax per dollar of interest, while someone in the 12% bracket pays 12 cents. This is why high-yield savings accounts, which pay 4% to 5% APY, look less attractive once you calculate the after-tax return.

Calculating your after-tax return on savings

To know what you actually keep from your savings interest, subtract the tax you owe. If a high-yield account pays 4.5% APY and you're in the 24% federal tax bracket plus a 5% state tax bracket, your combined rate is 29%. On $10,000, you'd earn $450 in interest but owe $130.50 in tax, leaving you with $319.50—an after-tax return of about 3.2%.

A regular savings account paying 0.01% APY earns $1 on $10,000 and costs you roughly $0.29 in tax, leaving $0.71. The math is simpler but the outcome is the same: interest is taxable, and the tax reduces your real gain.

This calculation matters when comparing accounts. A bank advertising "5% APY" is showing the pre-tax rate. Your actual earnings depend on your tax situation. If you're in a high bracket, the after-tax return of a 4.5% account may be lower than you expect.

Tax-advantaged accounts that shield interest from tax

Traditional IRAs and 401(k) plans allow interest to grow without annual taxation. You don't pay tax on the interest until you withdraw money in retirement. This lets compound interest work longer without being reduced by taxes each year.

Roth IRAs and Roth 401(k)s go further: interest grows tax-free and you pay no tax on withdrawals in retirement, provided you follow the rules. For 2024, you can contribute up to $7,000 to a Roth IRA (or $8,000 if you're 50 or older), and all interest earned stays yours.

529 education savings plans let interest grow tax-free if you use the money for may have access to education expenses. Health Savings Accounts (HSAs) offer tax-free growth if withdrawals pay for medical costs. These accounts are most useful if you have a specific goal and can follow the withdrawal rules, but they eliminate the annual tax hit on interest.

If you're saving outside these accounts, you cannot avoid the tax on interest. You report it and pay based on your bracket. The only way to reduce it is to earn less interest (by keeping money in lower-yield accounts) or to move money into a tax-advantaged account if you're may be able to access.

What happens if you don't report interest income

The IRS receives a copy of every 1099-INT your bank sends. If you don't report the interest on your return, the IRS will notice the discrepancy. The agency matches 1099 forms to tax returns automatically and flags missing income.

Failing to report interest can result in penalties and interest charges on the unpaid tax. The penalty for negligence is typically 20% of the underpaid tax. If the IRS determines the omission was intentional, the penalty rises to 75%. You'll also owe interest on the unpaid tax, compounded daily, from the original due date.

If you made an honest mistake, filing an amended return (Form 1040-X) as soon as you realize the error reduces the penalty. The IRS is more lenient with taxpayers who correct themselves than with those caught during an audit.

Interest from CDs, money market accounts, and other savings products

Certificates of Deposit (CDs) earn interest just like savings accounts, and that interest is fully taxable. A CD paying 5% APY for one year on $10,000 generates $500 in taxable income, reported on a 1099-INT. You owe tax on the interest even if you don't withdraw the CD until maturity.

Money market accounts and money market funds also generate taxable interest reported on a 1099-INT. The difference between a money market account (held at a bank) and a money market fund (held at a brokerage) is mainly in FDIC insurance and yield, but both produce taxable interest income.

Interest from bonds and bond funds is taxable, though the tax treatment varies. Interest from U.S. Treasury bonds is exempt from state tax but subject to federal tax. Municipal bonds often pay interest that is exempt from federal tax (and sometimes state tax). Corporate bonds and bond funds generate fully taxable interest.

Frequently Asked Questions

Do I have to report interest under $10?

Yes. The $10 threshold only determines whether your bank sends a 1099-INT. You must report all interest income on your tax return, even $1 or $5. The IRS expects you to track it yourself if the bank doesn't formally report it.

Can I deduct savings account interest as a loss?

No. Interest income cannot be offset by losses or deductions. You report the full amount as income. The only way to reduce your tax bill is to earn less interest or to use tax-advantaged accounts.

What if I earned interest in multiple states?

You report all interest on your federal return. For state taxes, you typically report interest to the state where you live, even if the bank is located elsewhere. Some states exempt interest from certain accounts or have different rules; check your state's tax authority.

Does moving money between my own accounts count as interest income?

No. Transferring money from one account to another is not income. Only the interest the bank pays you is taxable. Withdrawals and transfers don't change your tax obligation.

How do I report interest if I didn't receive a 1099-INT?

You report it on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest income, or directly on your Form 1040 if you have less. Contact your bank if you think you should have received a 1099-INT but didn't; they can issue a corrected one or confirm the amount.