Yes, the interest your savings account earns is taxable income

The money you deposit into a savings account is yours and not taxed again. But the interest the bank pays you on that money counts as income to the IRS. You report it on your federal tax return the same way you report wages or other earnings. The bank will send you a form called a 1099-INT each January showing how much interest you earned the previous year, and you use that number when you file taxes.

State income tax works the same way. If your state has an income tax, you owe tax on savings interest there too. A few states—including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—have no state income tax at all, so residents don't file state returns. Everyone else reports savings interest to their state.

The amount of tax you pay depends on your total income for the year and your tax bracket. Someone in a higher bracket pays a higher percentage on that interest than someone in a lower bracket. The bank does not withhold tax automatically—you pay it when you file your return.

Key Takeaways

  • Interest earned in a savings account is taxable income at both federal and state levels, reported on your tax return each year.
  • Your bank sends you a 1099-INT form in January showing the interest you earned, which you use to file taxes.
  • The tax rate on savings interest depends on your overall income and tax bracket, not on a flat rate.
  • Eight states have no income tax, so residents in those states owe federal tax on savings interest but not state tax.
  • High-yield savings accounts earn more interest, which means more taxable income, so the tax impact is larger than with traditional savings accounts.

When you get the 1099-INT form and what to do with it

Banks mail or email the 1099-INT by January 31 each year. It shows interest paid to you during the previous calendar year. If you earned less than $10 in interest at a single bank, the bank may not send a form, but you still owe tax on that interest—you report it even without the form.

When you file your tax return, you enter the amount from the 1099-INT on Schedule 1 (Form 1040) under "Interest." If you have multiple savings accounts at different banks, you receive a separate 1099-INT from each one, and you add them all together on your return. The IRS also receives a copy of each 1099-INT, so they know what interest you earned.

Keep your 1099-INT forms for at least three years in case the IRS asks questions about your return. You do not send the form with your tax return—the IRS gets their copy directly from the bank.

How high-yield savings accounts change your tax bill

A high-yield savings account earns significantly more interest than a traditional savings account. Rates vary by bank and change frequently, but a high-yield account might earn 4% to 5% annually, while a regular savings account might earn 0.01%. On a $10,000 balance, that difference means $400 to $500 in extra interest per year—and extra taxable income.

The higher interest is real money in your pocket, but you need to account for the tax when you plan your finances. If you earn $500 in interest and you are in the 22% federal tax bracket, you owe roughly $110 in federal tax on that interest. Some of that interest goes to taxes instead of staying in your account.

This does not mean high-yield accounts are a bad choice—the interest still beats what you earn elsewhere. But it means you should not be surprised when your tax bill is higher in a year you move money to a high-yield account.

Savings accounts for minors and dependents

If you open a savings account for a child or dependent, the interest earned in that account is taxable income to the child, not to you as the parent or guardian. You report it on the child's tax return, not yours.

There is a special rule called the kiddie tax that applies to dependents under age 24 (with some exceptions). If the child's unearned income—which includes savings interest—exceeds a certain threshold, the excess is taxed at the parent's rate rather than the child's rate. For 2024, that threshold is $1,300. If a child earns $2,000 in savings interest, the first $1,300 is taxed at the child's rate, and the remaining $700 is taxed at the parent's rate. The exact threshold changes each year.

Many children with savings accounts earn less than $1,300 per year in interest, so the kiddie tax does not apply to them. But if you are saving a large amount for a child, it is worth understanding how this rule works.

Tax-advantaged accounts that avoid or defer savings interest tax

A Roth IRA is a retirement account where interest and investment gains grow tax-free. You never pay tax on the interest earned inside a Roth IRA, as long as you follow the withdrawal rules. Contributions are limited each year—for 2024, the limit is $7,000 for people under 50—but the tax savings can be substantial over time.

A traditional IRA also defers tax on interest. 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 works similarly: interest grows tax-free as long as you use the money for education expenses.

A regular savings account has no contribution limits and no restrictions on when you withdraw money, so it is more flexible than retirement accounts. But if you have money you will not need for years, moving some of it to a Roth IRA or 529 plan can reduce your annual tax bill.

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 tax return, the IRS will notice the mismatch between what you reported and what the bank reported. They will send you a notice asking for the missing tax, plus interest and penalties.

The penalty for not reporting income is usually 20% of the unpaid tax, plus interest that compounds daily. If you owed $100 in tax and did not report it, you might end up owing $120 or more by the time the IRS catches up. It is much cheaper to report the interest when you file.

If you made an honest mistake and forgot to report a small amount of interest, the IRS is often willing to waive penalties if you file an amended return promptly. But if the IRS thinks you intentionally hid income, the penalties are steeper.

Frequently Asked Questions

Do I have to report savings interest if I earned less than $1,000?

Yes. There is no minimum amount of interest that is tax-free. Even $10 in interest is taxable income and should be reported on your return. The bank may not send a 1099-INT if you earned less than $10, but you still owe tax on it.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount on your tax return. Fees you pay to the bank are not deductible against that interest. However, if you have significant investment expenses, you may be able to deduct them as miscellaneous deductions, though rules are strict.

What if I moved money between banks mid-year and got two 1099-INT forms?

Add the amounts from both forms together and report the total on your tax return. The IRS will receive both forms too, so they will expect to see the combined total. Do not report each form separately or you will appear to have earned twice as much interest as you actually did.

Does a joint savings account get taxed differently?

If you own a joint account with another person, the interest is split between you based on each person's ownership share. The bank reports the full interest on one 1099-INT, but you and the other owner each report your share on your own tax returns. Confirm with the bank how they are splitting the interest.

Is there a way to avoid paying tax on savings interest?

Not on a regular savings account—all interest is taxable. But you can reduce your overall tax bill by using tax-advantaged accounts like Roth IRAs or 529 plans for money you will not need immediately. You can also look for banks offering higher interest rates, since the same tax applies whether you earn 0.5% or 5%.