Interest from a savings account counts as taxable income
The money your bank pays you for keeping money in a savings account is ordinary income to the IRS. You owe federal income tax on every dollar of interest you earn, no matter how small the amount. Your state may tax it too, depending on where you live.
The bank reports this interest to you and to the IRS on a Form 1099-INT each January. You then report it on your tax return. If you don't report it and the IRS catches the discrepancy, you'll owe back taxes plus penalties and interest.
How much tax you actually pay depends on your total income for the year and your tax bracket. Someone in the 22% federal bracket pays 22 cents in federal tax on every dollar of interest. Someone in the 10% bracket pays 10 cents. The rate is the same whether the interest comes from a savings account, money market account, or CD.
Key Takeaways
- Banks report all savings account interest to the IRS on Form 1099-INT, and you must report it as income on your tax return.
- The tax you owe on interest depends on your total income and federal tax bracket, ranging from 10% to 37% at the federal level.
- You may also owe state income tax on the interest, depending on your state's tax laws.
- Interest under $10 for the year typically doesn't require a Form 1099-INT, but you still owe tax on it if you have other reportable income.
- High-yield savings accounts earn more interest than traditional savings accounts, which means a larger tax bill unless the money is in a tax-advantaged account.
When the bank sends you a 1099-INT form
Your bank mails or emails a Form 1099-INT by January 31 each year if you earned $10 or more in interest during the previous calendar year. The form shows the total interest paid to you and goes to both you and the IRS.
If you earned less than $10, the bank doesn't have to send a 1099-INT, but you still owe tax on that interest if you have other income to report. Many people miss this because they assume no form means no tax obligation.
You'll receive one 1099-INT per bank account if you have multiple accounts at the same institution. If you have accounts at different banks, you'll get a separate form from each one. Keep all your 1099-INT forms together when you file your return.
How to report interest income on your tax return
On the federal level, you report interest income on Schedule B (Interest and Ordinary Dividends) if your total interest and dividend income exceeds $1,500. If it's $1,500 or less, you can report it directly on Form 1040, line 2b, without filing Schedule B.
Add up the interest from all your 1099-INT forms and enter the total. The IRS matches this number to what the banks reported, so accuracy matters. If your total doesn't match what the banks sent in, the IRS will send you a notice.
State tax returns vary. Some states follow the federal rule and tax all interest income. Others exempt interest from certain types of accounts or have different reporting thresholds. Check your state's tax agency website or your state tax form instructions to see what applies to you.
Tax-advantaged accounts that avoid or defer interest tax
If you want to earn interest without paying tax on it immediately, certain accounts let you do that. A Roth IRA or Roth 401(k) lets you earn interest tax-free as long as you follow the withdrawal rules. A traditional IRA or 401(k) defers the tax until you withdraw the money in retirement.
A 529 college savings plan lets you earn interest tax-free if you use the money for may have access to education expenses. A Coverdell Education Savings Account works the same way for education costs.
These accounts have contribution limits and withdrawal rules, so they're not right for all savings. But if you're saving for a specific goal — retirement, education, a child's future — they can reduce or eliminate the tax on interest you earn.
How high-yield savings accounts change your tax bill
A high-yield savings account pays significantly more interest than a traditional savings account — sometimes 4% or 5% annually, compared to 0.01% at many big banks. That higher rate means a much larger 1099-INT form and a bigger tax bill.
If you have $10,000 in a high-yield account earning 4.5%, you'll earn $450 in interest per year. At the 22% federal tax bracket, that's $99 in federal tax. At the 12% bracket, it's $54. The same $10,000 in a traditional savings account earning 0.01% would earn $1 in interest and roughly 10 to 22 cents in tax.
This doesn't mean high-yield accounts are a bad choice — the extra interest still leaves you ahead. But it's worth understanding that the higher earnings come with a higher tax cost. If you're in a high tax bracket or have a large balance, the tax impact is real.
What to do if you didn't receive a 1099-INT
If you earned interest but didn't get a 1099-INT by early February, contact the bank directly. Ask them to send it or confirm that the amount was below $10. Keep a record of the conversation in case the IRS asks about it later.
If the bank confirms you earned interest but won't send a form, report the interest anyway on your tax return. You can note on Schedule B that you didn't receive a 1099-INT. The IRS may follow up, but reporting the income protects you from penalties.
If you filed your return without reporting interest you later found out about, you can file an amended return using Form 1040-X. The sooner you do this, the better — it shows you caught the error yourself rather than waiting for the IRS to find it.
Interest from joint accounts and accounts for minors
If you have a joint savings account, the bank reports all the interest to both account holders unless you tell them otherwise. You and the other owner may need to split the interest income on your separate tax returns, or one person may claim it all depending on your agreement. Check with the bank about how they report it.
If you opened a savings account for a minor child, the interest is taxable income to the child, not to you as the parent. The child must report it on their own tax return if they file one. If the child has no other income and the interest is their only income, they may not have to file, but it depends on the amount and their age.
A parent can sometimes claim a dependent child on their own return even if the child has interest income. The child's tax situation is separate from yours, so don't assume the interest automatically belongs on your return just because you control the account.
Frequently Asked Questions
Do I have to pay tax on interest if I'm retired?
Yes. Interest income is taxable regardless of your age or employment status. However, if your total income in retirement is low enough, you may not owe federal income tax. The threshold depends on your filing status and age — people over 65 have a higher threshold. Check the IRS website for current income limits.
What if my interest income pushes me into a higher tax bracket?
Interest is added to your other income, and if the total crosses into a higher bracket, you pay the higher rate on the interest and any other income in that bracket. This is called "bracket creep." It's one reason some people move money to tax-advantaged accounts as they earn more.
Can I deduct the taxes I pay on interest from my savings account?
No. Interest income is ordinary income, and the tax you owe on it is not deductible. You report the interest, calculate your tax based on your bracket, and pay it. There's no offsetting deduction.
What happens if I earn interest in a foreign bank account?
Foreign interest is taxable to the IRS the same way U.S. interest is. You report it on your tax return. If you have foreign financial accounts over a certain threshold, you may also have to file additional forms like the FBAR or FATCA forms. Consult a tax professional if you have foreign accounts.
Is interest from a money market account taxed differently than interest from a savings account?
No. Money market accounts, savings accounts, and CDs are all taxed the same way — as ordinary income at your marginal tax rate. The type of account doesn't matter to the IRS, only the amount of interest earned.