Interest from a high interest savings account counts as ordinary income on your tax return

The interest your bank pays you on a high interest savings account is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on every dollar. Most banks will send you a Form 1099-INT in January showing how much interest you earned the previous year, and you report that amount on your tax return.

The tax you owe depends on your total income and your tax bracket. If you earned $500 in interest and you're in the 22% federal tax bracket, you'll owe roughly $110 in federal tax on that interest alone — plus state income tax if your state has one. The higher your savings balance and the higher the APY, the more interest you earn and the more tax you owe.

You don't pay tax on the money itself, only on the interest it generates. If you deposit $10,000 and earn $200 in interest over a year, you pay tax on the $200, not the $10,000.

Key Takeaways

  • Banks report interest earnings on Form 1099-INT, which you must include on your federal tax return as ordinary income.
  • The tax rate you pay on interest depends on your tax bracket, which ranges from 10% to 37% at the federal level.
  • State income tax applies to savings interest in most states, adding another layer of tax on top of federal tax.
  • You can reduce taxable interest by holding savings in tax-advantaged accounts like IRAs or 529 plans, where interest grows tax-free or tax-deferred.

When the bank sends you Form 1099-INT

Your bank will mail or email you a Form 1099-INT by January 31 each year if you earned $10 or more in interest during the previous calendar year. This form shows the total interest paid to you and goes to the IRS at the same time it goes to you.

You need this form to file your tax return accurately. The IRS already has a copy, so if you don't report the interest income and the IRS notices the mismatch, you'll face penalties and interest charges on the unpaid tax. Keep the 1099-INT with your tax records for at least three years.

If you earned less than $10 in interest, the bank may not send a 1099-INT, but you still owe tax on that interest. You'll need to track it yourself and report it on your return.

How your tax bracket determines what you actually pay

Interest income is added to your other income — wages, self-employment earnings, investment gains — and taxed at your marginal rate. If you earn $60,000 in wages and $500 in interest, the IRS treats your total taxable income as $60,500.

Federal tax brackets for 2024 range from 10% to 37%, depending on your filing status and total income. A single filer in the 22% bracket who earns $500 in interest owes roughly $110 in federal tax on that interest. Someone in the 12% bracket owes roughly $60. Someone in the 37% bracket owes roughly $185.

The more you earn from other sources, the higher your bracket climbs, and the more you pay on each dollar of interest. This is why high earners with large savings balances can face steep tax bills on interest income.

State income tax on savings interest

Most states tax interest income the same way the federal government does — as ordinary income. If your state has an income tax, you'll owe state tax on top of federal tax. State rates vary widely: some states tax interest at rates between 3% and 5%, while others go as high as 13%.

A handful of states don't tax interest income at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you only owe federal tax on your interest.

If you live in a state with income tax and earn $500 in interest, you might owe $110 in federal tax plus $25 to $65 in state tax, depending on your state's rate and your income level.

Tax-advantaged accounts that shield interest from taxes

If you want to earn interest without paying tax on it immediately, you can hold savings in certain accounts where interest grows tax-free or tax-deferred. The most common options are traditional IRAs, Roth IRAs, and 529 education savings plans.

In a Roth IRA, interest and other investment earnings grow tax-free forever — you never pay tax on the interest as long as you follow the withdrawal rules. In a traditional IRA, interest grows tax-deferred, meaning you don't pay tax until you withdraw the money in retirement. A 529 plan works similarly for education expenses: interest grows tax-free if you use the money for may have access to education costs.

These accounts have contribution limits and withdrawal rules, so they're not a fit for all savings. But if you have money you won't need for years, moving it into a Roth IRA or 529 can save you thousands in taxes on the interest it earns.

What happens if you don't report the interest

The IRS receives a copy of every 1099-INT your bank sends you. If you don't report the interest on your tax return, the IRS will eventually notice the gap between what you reported and what the bank reported. This triggers a notice demanding payment of the unpaid tax, plus penalties and interest.

The penalty for not reporting income is typically 20% of the unpaid tax, on top of the tax itself and interest charges that accrue daily. If you owed $110 in tax and didn't report it, you could end up owing $132 in tax plus penalties plus interest — and the interest compounds over time.

If the IRS suspects intentional fraud rather than an honest mistake, penalties can reach 75% of the unpaid tax. The safest approach is to report all interest income, even small amounts.

Frequently Asked Questions

Do I have to pay tax on interest if I earned less than $10?

Yes. The $10 threshold only determines whether the bank sends you a 1099-INT form. You still owe tax on all interest income, regardless of the amount. You'll need to track it yourself and report it on your return.

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

No. Interest income is reported as gross income, and you cannot deduct the taxes you pay on it. However, if you paid investment-related fees or had investment losses, those may be deductible under certain conditions — consult a tax professional about your specific situation.

What if I move money between high interest savings accounts during the year?

The interest is taxable regardless of which account holds the money or how many times you move it. The 1099-INT will show the total interest earned across all accounts at that bank. If you have accounts at multiple banks, each will send a separate 1099-INT.

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

Yes. Money market accounts, certificates of deposit (CDs), and other savings products all generate interest that's taxed as ordinary income. The bank will send a 1099-INT for any of these accounts if interest exceeds $10.

Can I avoid taxes by keeping my savings under a certain amount?

No. There is no threshold below which interest becomes tax-free. Even $1 in interest is taxable income. The only way to avoid tax on interest is to hold money in tax-advantaged accounts like a Roth IRA or to live in a state with no income tax.