Savings account interest is taxable income to the IRS
Any interest your savings account earns counts as taxable income in the year you earn it. The bank reports it to you and to the IRS on a Form 1099-INT. You owe federal income tax on that interest at your ordinary income tax rate — the same rate you pay on wages or salary. Some states also tax savings interest, depending on where you live.
The amount of tax you owe depends on two things: how much interest you earned and your tax bracket. A person in the 22% federal tax bracket who earns $500 in savings interest owes roughly $110 in federal tax on that interest alone. Someone in the 12% bracket owes roughly $60. The IRS does not care that the interest rate is low — 4% or 5% on a savings account still counts as income.
You do not pay tax on the interest when you earn it. Instead, you report it when you file your tax return, usually by April 15 of the following year. If you owe a large amount of tax and did not have it withheld during the year, you may owe a penalty for underpayment.
Key Takeaways
- The IRS taxes all savings account interest as ordinary income at your federal tax rate, which varies from 10% to 37% depending on your income level.
- Banks send you a Form 1099-INT each January showing the interest you earned the previous year, and they send a copy to the IRS.
- You report the interest on your tax return; you do not pay tax when the interest posts to your account.
- Some states tax savings interest and some do not, so your total tax bill depends on where you live and file taxes.
- High-yield savings accounts earn more interest than traditional savings accounts, which means a larger tax bill on that interest.
How the IRS gets the information and when you report it
Your bank tracks every cent of interest it pays you and reports the total on a Form 1099-INT. The bank mails you a copy by January 31 and sends another copy directly to the IRS. You do not have to ask for this form — it arrives automatically if you earned at least $1 in interest during the year. Some banks send it electronically instead of by mail.
When you file your federal tax return, you enter the interest amount from the 1099-INT on your return. If you use tax software, it usually has a field for this number. If you file by hand, you report it on Schedule 1 (Form 1040). The IRS already knows the number because the bank sent it to them, so underreporting or omitting it triggers an automated mismatch notice.
You file your return by April 15 of the year after you earned the interest. If you earned $500 in interest during 2024, you report it on your 2024 tax return, which you file in early 2025. If you have not received your 1099-INT by early February, contact the bank directly — they are required to send it by January 31.
Your tax bracket determines how much you owe
Federal income tax is progressive, meaning the rate increases as your income goes up. In 2024, the rates range from 10% for the lowest earners to 37% for the highest. Your savings interest is added to your other income (wages, self-employment, capital gains, and so on) to determine which bracket you fall into.
If you earn $50,000 in wages and $500 in savings interest, the IRS treats you as earning $50,500. That $500 is taxed at whatever your marginal rate is — the rate that applies to your last dollar of income. For most people, that is somewhere between 12% and 24%, but it depends on your filing status and total income.
This is why high-yield savings accounts can create a surprise tax bill. A $50,000 balance earning 4.5% APY generates $2,250 in interest per year. If you are in the 22% bracket, you owe roughly $495 in federal tax on that interest alone. That reduces your real return from 4.5% to about 3.5% after taxes.
State and local taxes on savings interest
Most states tax savings interest the same way the federal government does — as ordinary income. Your state tax rate varies by state and by income level, just like federal tax. Some states have no income tax at all, so residents pay federal tax on savings interest but no state tax.
States with no income tax include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe only federal tax on your savings interest. If you live elsewhere, add your state income tax rate to your federal rate to find your total tax burden.
A few states tax interest differently. New Hampshire and Tennessee tax only dividend and interest income, not wages. Illinois exempts interest earned before 2026 but will begin taxing it after that. Check your state's tax authority website if you want to know the exact rules where you file.
What happens if you earn very little interest
If you earn less than $1,500 in interest during the year, your bank may not send you a 1099-INT — the threshold varies by bank. However, you still owe tax on that interest even if you do not receive a form. You are required to report all income, whether or not you receive a 1099.
In practice, the IRS focuses enforcement on larger amounts. A $50 interest payment on a savings account is unlikely to trigger an audit. But if you have multiple accounts or a large balance, the interest adds up quickly, and the IRS will notice if you do not report it.
If you are unsure whether to report small amounts of interest, report it anyway. Reporting income you earned is never wrong. Failing to report income the IRS knows about — because the bank told them — creates a mismatch that can lead to penalties and interest charges.
Tax-advantaged alternatives to regular savings accounts
If you want to earn interest without paying tax on it immediately, you have limited options. A Roth IRA lets you earn interest and other investment gains tax-free, but you can only contribute $7,000 per year (or $8,000 if you are 50 or older), and you cannot withdraw the money before age 59½ without penalty. A traditional IRA defers the tax until you withdraw the money in retirement.
A 529 college savings plan lets you earn interest and investment gains tax-free as long as you use the money for may have access to education expenses. If you withdraw it for something else, you pay tax on the earnings plus a 10% penalty.
For most people saving outside retirement accounts, there is no way to avoid tax on savings interest. You earn it, you report it, and you pay tax at your ordinary income rate. The only real choice is whether to keep your money in a high-yield savings account (earning more interest and owing more tax) or a regular savings account (earning less interest and owing less tax).
Frequently Asked Questions
Do I have to pay taxes on interest if I earned less than $1,000?
Yes. The $1,500 threshold for receiving a 1099-INT is just a reporting requirement — it does not change whether you owe tax. You are required to report all interest income on your tax return, no matter how small. The IRS expects you to add it up yourself if you do not receive a form.
What if I move money between accounts during the year — do I get taxed twice?
No. You are taxed on the interest earned, not on the money itself. If you move $10,000 from one savings account to another, that is not taxable. Only the interest that account earns is taxable, and you report it once on your tax return.
Can I deduct savings account interest as a loss?
No. Interest income is always taxable; you cannot deduct it as a loss or offset it against other income. The only way to reduce your tax bill is to earn less interest or to use tax-advantaged accounts like IRAs or 529 plans.
Do I owe taxes on interest if I did not withdraw the money?
Yes. The IRS taxes interest in the year you earn it, not when you withdraw it. If your account earned $500 in interest in 2024 but you did not touch the money, you still report that $500 on your 2024 tax return and owe tax on it.
What if the bank made a mistake on my 1099-INT?
Contact the bank immediately and ask them to issue a corrected form (Form 1099-INT with a "CORRECTED" box checked). They will send the corrected version to you and to the IRS. Once you receive it, report the correct amount on your tax return. If you already filed, you may need to file an amended return.