Savings account interest counts as taxable income
Interest you earn in a savings account is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on the full amount. Most states also tax savings interest as part of your state income tax, though a few states do not.
Your bank or credit union will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. You report that amount on your federal tax return. If you earned less than $10, the bank does not have to send the form, but you still owe tax on whatever you earned.
The tax you owe depends on your total income and your tax bracket. If you earn $50 in interest and you are in the 22% tax bracket, you owe roughly $11 in federal tax on that interest. If you are in the 12% bracket, you owe roughly $6. The exact amount also depends on whether you take the standard deduction and what other income you have.
Key Takeaways
- All savings account interest is taxable income at both the federal and state level (with a few state exceptions), and you report it on your tax return each year.
- Your bank sends you a Form 1099-INT in January if you earned $10 or more in interest the previous year, showing the exact amount you owe tax on.
- The tax you owe on interest depends on your tax bracket — someone in a higher bracket pays a larger percentage of the interest as tax.
- High-yield savings accounts earn more interest than traditional savings accounts, which means you owe more tax, but you still come out ahead in after-tax dollars.
When the IRS requires your bank to report interest
Banks and credit unions must file a Form 1099-INT with the IRS if you earned $10 or more in interest during the calendar year. They mail you a copy by January 31 of the following year. If you earned $9.99, they do not have to file the form, but the interest is still taxable.
Some banks send the 1099-INT electronically through your online account portal. Others mail a paper copy. Either way, you should receive it before you file your taxes. If you do not receive it by early February, contact your bank and ask for a copy — you need it to file accurately.
If you have accounts at multiple banks, you will receive a separate 1099-INT from each one. You add all the interest amounts together when you report your income to the IRS.
How to report interest on your tax return
On your federal tax return, you report savings interest on Schedule 1, Part I, line 2a (for Form 1040). The line is labeled "Interest." You enter the total interest from all your 1099-INT forms. If you earned less than $10 and did not receive a form, you still report the interest on this line.
The interest amount then flows into your total income, which determines your tax bracket and how much tax you owe overall. If you use tax software like TurboTax or TaxAct, you enter the 1099-INT information when prompted, and the software places it in the correct spot automatically.
For state taxes, most states have a similar line on their income tax forms. A few states — including Pennsylvania, New Hampshire, and Tennessee — do not tax interest income, so you would not report it on those state returns. Check your state's tax authority website if you are unsure whether your state taxes interest.
The difference between high-yield and traditional savings accounts
A high-yield savings account earns more interest than a traditional savings account — often 4% to 5% annually, compared to 0.01% or less at many traditional banks. This means you earn more money, but you also owe more tax on that money.
If you have $10,000 in a high-yield account earning 4.5% annually, you earn $450 in interest. If you are in the 22% federal tax bracket, you owe roughly $99 in federal tax on that interest, leaving you with about $351 after tax. In a traditional savings account earning 0.01%, you would earn $1 in interest and owe roughly $0.22 in tax.
Even after paying tax on the higher interest, you come out significantly ahead with a high-yield account. The after-tax earnings are still much larger. The tax is simply the cost of earning more money.
What happens if you do not report interest income
If you earned $10 or more in interest, your bank filed a 1099-INT with the IRS. The IRS receives a copy and knows how much interest you earned. If you do not report it on your tax return, the IRS will notice the discrepancy — their computer system matches 1099 forms to tax returns automatically.
The IRS may send you a notice asking why the interest is missing from your return. You will owe the tax you should have paid, plus penalties and interest on the unpaid amount. The penalty is typically 20% of the unpaid tax, and interest accrues daily. It is far simpler to report the interest when you file.
If you earned less than $10 and did not receive a 1099-INT, the IRS is less likely to catch the omission, but you still owe the tax. Reporting all income, even small amounts, keeps your return accurate and protects you.
Strategies to reduce tax on savings interest
You cannot avoid tax on savings interest, but you can reduce the amount you owe by earning interest in a tax-advantaged account. A Roth IRA or Roth 401(k) allows you to earn interest and other investment gains tax-free, as long as you follow the withdrawal rules. Money in these accounts grows without triggering annual tax bills.
A traditional IRA or 401(k) defers the tax — you do not pay tax on the interest while the money is in the account, but you pay tax on withdrawals in retirement. A 529 college savings plan lets interest grow tax-free if you use the money for education expenses.
For savings outside retirement accounts, there is no way to avoid the tax. You earn interest, you report it, and you pay tax on it. The key is to choose a high-yield account anyway — the after-tax return is still better than a low-yield account, even after you pay the tax.
Interest from different account types and sources
Savings account interest is not the only type of interest you report. Money market accounts, certificates of deposit (CDs), and savings bonds all generate taxable interest. Your bank or the issuer sends you a 1099-INT for each one if the interest exceeds $10.
Interest from a checking account is also taxable, though most checking accounts earn little or no interest. Interest from a loan you made to someone else is taxable to you. Interest you paid on a mortgage or student loan may be deductible, which reduces your taxable income — but that is separate from the interest you earn.
If you have multiple sources of interest income, add them all together when you report on your tax return. The total is what determines your tax liability.
Frequently Asked Questions
Do I have to pay tax on interest if I earned less than $10?
Yes. The $10 threshold only determines whether your bank has to send you a 1099-INT form. You still owe tax on any interest you earn, no matter how small. Report it on your tax return even if you did not receive a form.
Can I claim interest as a deduction to lower my taxes?
No. Interest you earn is income, not a deduction. You cannot subtract it from your other income. The only interest you can deduct is interest you paid — such as mortgage interest or student loan interest — and that is a separate calculation on your tax return.
What if I moved money between banks during the year?
Each bank reports only the interest earned in accounts you held with them. If you moved $5,000 from Bank A to Bank B in June, Bank A reports the interest earned January through June, and Bank B reports the interest earned July through December. You add both 1099-INT forms together when you file.
Does a high-yield savings account cost more in taxes than a regular savings account?
Yes, you owe more tax because you earn more interest. But your after-tax profit is still much larger. If a high-yield account earns $450 and you owe $99 in tax, you keep $351. A regular account earning $1 leaves you with roughly $0.78 after tax. The higher-yield account wins even after taxes.
What if I earned interest in a joint account?
The bank reports the full interest amount on a 1099-INT. If the account is jointly owned, you and the other owner must decide how to split the interest for tax purposes. Many couples split it 50/50, but you can split it differently if that matches how you actually own the account. Coordinate with the other owner so you both report consistent amounts.