Savings accounts themselves are tax-free, but the interest they earn is not

The money you put into a savings account stays yours with no tax attached. The interest your bank pays you on that balance, however, counts as income to the IRS and must be reported on your tax return. This is true whether the account is at a traditional bank, credit union, or online bank.

The tax applies to all interest earned during the calendar year, no matter how small the amount. Your bank will send you a Form 1099-INT in January showing the total interest paid to you in the previous year. You then report this on your federal tax return, and depending on your state, possibly on a state return as well.

Key Takeaways

  • Interest earned in a savings account is taxable income; the account balance itself is not.
  • Banks report interest of $10 or more on Form 1099-INT, which you receive by January 31.
  • You must report all savings account interest on your federal tax return, even amounts under $10.
  • Some account types—such as Roth IRAs and certain education savings accounts—hold savings that grow tax-free, but regular savings accounts do not.
  • State income tax may also apply to savings interest, depending on where you live.

When your bank reports interest to the IRS

Your bank issues a Form 1099-INT for any interest of $10 or more paid during the year. This form arrives by January 31 and shows the total interest credited to your account. The IRS receives a copy at the same time.

Even if your interest is less than $10, you still owe tax on it and must report it on your return. The $10 threshold only determines whether the bank sends you a 1099-INT; it does not determine whether you have a tax obligation. If you earned $5 in interest and received no form, you still report that $5 on your tax return.

If you have multiple savings accounts at different banks, each will send its own 1099-INT. You add all the interest together when you file.

How much tax you owe on savings interest

The tax rate on interest depends on your overall income and tax bracket. Interest is treated as ordinary income, meaning it is taxed at the same rate as wages or salary. If you are in the 22% tax bracket, you owe roughly 22% of your interest in federal tax (though the exact amount depends on other factors in your return).

For example, if you earned $200 in savings interest and your federal tax bracket is 22%, you would owe approximately $44 in federal tax on that interest. State income tax, where it applies, is calculated separately and added on top.

The interest itself is not withheld by the bank—you receive the full amount. You pay the tax when you file your return or through quarterly estimated tax payments if you have other income sources that require it.

State income tax on savings interest

Most states that have an income tax also tax savings account interest at their state rate. A few states do not tax interest income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. New Hampshire and Tennessee tax only interest and dividend income, not wages.

If you live in a state with income tax, your state return will ask for the same interest information as your federal return. You report the total interest from all your accounts, and your state calculates tax based on its rate and your state income level.

Tax-free savings alternatives

Certain account types allow savings to grow without any tax on the interest. A Roth IRA holds contributions and earnings that are never taxed, provided you follow withdrawal rules. A 529 education savings plan lets money grow tax-free when used for may have access to education expenses. A Health Savings Account (HSA) grows tax-free if used for medical costs.

These accounts have contribution limits, age restrictions, or rules about how the money can be used. A regular savings account has none of those restrictions, which is why it is simpler to open and use—but also why interest is taxed. If you have a large amount to save and want to avoid tax on the growth, speaking with a tax professional about which account type fits your situation can be worthwhile.

Reporting interest on your tax return

Interest income goes on Schedule B (Interest and Ordinary Dividends) if you file Form 1040. You list each account or bank separately if you have more than one, then add them to get your total interest income. This total then transfers to your main tax form.

If your total interest is $1,500 or less and you have no other investment income, you can report the total directly on Form 1040 without filing Schedule B, depending on the tax year. Check the current year's instructions or ask a tax preparer about the threshold for your situation.

If you did not receive a 1099-INT but earned interest, you still report it. Keep your bank statements as proof in case the IRS asks questions later.

What happens if you do not report savings interest

The IRS receives a copy of every 1099-INT your bank sends. If you do not report the interest on your return, the IRS will notice the mismatch between what you reported and what the bank reported. This can trigger a notice asking you to explain the difference or pay the tax owed plus penalties and interest.

Even small amounts matter. Reporting $50 in interest you forgot about is far simpler than dealing with an IRS notice months later. If you discover you missed interest in a prior year, you can file an amended return (Form 1040-X) to correct it.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

Yes. The $10 threshold only determines whether your bank sends you a 1099-INT form. You must report all interest earned, no matter the amount, on your tax return. Keep your bank statements to document what you earned.

What if I have savings in multiple banks?

Each bank sends its own 1099-INT if interest is $10 or more. You add all the interest together and report the total on your return. If one bank paid $8 and another paid $12, you report $20 total, even though only one sent a form.

Can I avoid tax by moving money between accounts?

No. The tax is based on interest earned, not on how many accounts hold the money. Moving $10,000 from one savings account to another does not create new interest or change your tax obligation. Only the actual interest paid by the bank is taxable.

Is interest taxed differently if I am retired?

Interest is taxed the same way regardless of your age or employment status. However, if your total income is low enough, you may not owe federal tax at all. Retirees with only Social Security and small amounts of interest may fall below the filing threshold, though you should still file to claim any refundable credits.

What if my savings account is in a child's name?

Interest earned in a child's account is the child's taxable income. If the child's total income is below the filing threshold, no return is required. If it exceeds the threshold, the child (or a parent filing on their behalf) must report it. The "kiddie tax" rules may apply if the child is under 24 and has unearned income above a certain level.