Interest on savings accounts is taxable income

The interest your bank pays you on a savings account counts as income to the IRS and most state tax agencies. You owe federal income tax on it, and depending on where you live, state income tax as well. The bank reports this interest to you and the IRS on a Form 1099-INT each January, and you report it on your tax return.

The amount of tax you pay depends on your total income for the year and your tax bracket — not on the interest amount alone. Someone in the 22% federal tax bracket pays roughly 22 cents in federal tax per dollar of interest earned. Someone in the 10% bracket pays roughly 10 cents. State tax varies by state; some states do not tax interest income at all, while others tax it at rates between 1% and 13%.

This applies to all savings accounts: regular savings, money market accounts, and high-yield savings accounts. The higher the interest rate, the more tax you owe. A high-yield account paying 4.5% annual interest generates more taxable income than a traditional savings account paying 0.01%, even though both are taxed the same way.

Key Takeaways

  • Banks report savings account interest to the IRS on Form 1099-INT, and you must report it as income on your tax return.
  • The tax rate you pay on interest depends on your overall income and tax bracket, not on the interest amount itself.
  • You owe both federal and state income tax on interest, though some states do not tax interest income.
  • Interest is taxed in the year it is earned, even if you do not withdraw the money from the account.

When the bank sends you a 1099-INT form

Your bank mails or emails 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. You receive a copy for your records and to use when filing your tax return.

If you have accounts at multiple banks, you will receive a separate 1099-INT from each one. Add up all the interest amounts across all forms when you report your income. If you earned less than $10 in total interest across all accounts, the bank may not send a 1099-INT, but you still owe tax on that interest if you had any tax liability for the year.

Keep the 1099-INT with your tax documents. If the amount on the form does not match what you see in your account statements, contact the bank to request a corrected form before you file your return.

How interest is taxed in your tax bracket

Interest income is ordinary income, which means it is taxed at the same rate as wages or salary. If you earn $50,000 in wages and $500 in interest, the IRS treats that $500 as part of your $50,500 total income and taxes it according to your bracket for that year.

Federal tax brackets change each year and depend on your filing status (single, married filing jointly, head of household, and so on). For 2024, a single filer in the 22% bracket pays roughly 22 cents in federal tax per dollar of interest. A married couple filing jointly in the 12% bracket pays roughly 12 cents per dollar. The lowest federal bracket is 10%, and the highest is 37%.

Your state may also tax interest income. States with no income tax — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax interest. Other states tax it at rates ranging from 1% (Louisiana) to 13.3% (California). Check your state's tax agency website to find the rate that applies to you.

Interest earned but not withdrawn still counts as taxable income

You owe tax on interest in the year it is earned, whether or not you withdraw the money. If your savings account earns $200 in interest during 2024, you report that $200 as income on your 2024 tax return — even if the money stays in the account and you never touch it.

This matters most for accounts where interest compounds and you leave it untouched. A $10,000 deposit in a high-yield account earning 4.5% annually generates $450 in interest the first year. If you do not withdraw it, that $450 stays in the account and earns interest itself the following year. You still owed tax on the original $450 in year one, and you will owe tax on the interest earned on that $450 in year two.

The bank's 1099-INT reflects only the interest paid during that calendar year, so you will see the compounding effect spread across multiple tax returns as the years go on.

State tax treatment varies widely

Nine states do not tax income at all, so residents of those states owe no state tax on savings interest. However, they may still owe federal tax. A resident of Florida earning $500 in interest owes federal tax on that $500 but no Florida state tax.

Most other states tax interest as ordinary income at their standard rates. A few states offer partial exemptions: Illinois excludes interest income for residents over 65, and Mississippi excludes interest for residents over 59½. Check your state's tax agency website or ask a tax preparer whether your state taxes interest and at what rate.

If you live in a state with income tax and move to a state without it, or vice versa, you may owe tax to both states for the year you move, depending on how long you lived in each place. The state you lived in for most of the year usually gets to tax your full-year income.

What to do if you earned very little interest

If you earned less than $10 in interest across all your accounts, your bank may not send a 1099-INT. You still owe tax on that interest if you had any tax liability for the year, but you will need to report it yourself based on your account statements.

If your total income for the year is low enough that you do not have to file a tax return at all — because it falls below the standard deduction for your filing status — you do not owe tax on the interest either. For 2024, the standard deduction is $14,600 for a single filer and $29,200 for married filing jointly. If your wages plus interest plus all other income is below that threshold, you have no tax liability.

When in doubt, file a return anyway. If you are owed a refund, filing ensures you get it. If you owe nothing, filing protects you from IRS notices later.

Frequently Asked Questions

Do I have to pay tax on interest if I did not withdraw the money?

Yes. You owe tax on interest in the year it is earned, regardless of whether you withdraw it or leave it in the account. The bank reports it to the IRS on your 1099-INT, and you report it on your tax return for that year.

What if my bank sent me a 1099-INT but I did not earn that much interest?

Contact the bank and ask them to verify the amount. If the form is wrong, request a corrected 1099-INT (Form 1099-INT with a corrected indicator) before you file your return. If the amount is correct but you believe it should not be, the bank can explain how they calculated it.

Can I deduct savings account interest as a business expense?

No. Interest earned on a personal savings account is not deductible. If you have a business account and earn interest on business funds, that interest is still taxable income to the business, not a deductible expense.

Do I owe tax on interest if I live in a state with no income tax?

You owe no state tax, but you still owe federal tax. States like Florida, Texas, and Nevada do not tax income, but the IRS does. You will report the interest on your federal tax return.

What if I earned interest in multiple accounts at different banks?

Add up all the interest from all your 1099-INT forms and report the total on your tax return. Each bank reports separately, but the IRS combines them when they process your return. Report the combined total on the appropriate line of your tax form.