Your savings account interest is taxable income, and you report it on your federal tax return

The money your bank pays you for keeping money in a savings account is interest income, and the IRS treats it like any other income you earn. You owe federal income tax on it. Most states also tax savings interest as part of your state income tax, though a few states do not tax interest income at all. 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 your taxes.

The amount of tax you pay depends on your total income for the year and your tax bracket. Someone earning $30,000 a year pays a lower percentage on savings interest than someone earning $150,000. The interest itself does not get taxed at a special rate — it is added to your other income and taxed at whatever rate applies to your total.

Key Takeaways

  • Banks report savings interest to the IRS on a 1099-INT form, and you must report it as income on your tax return.
  • The tax you owe on savings interest depends on your total income for the year and your tax bracket, not on the interest amount alone.
  • Most states tax savings interest, but a handful including Illinois, Mississippi, and Tennessee do not tax interest income.
  • If you earned less than $1,200 in interest during the year, the bank may not send you a 1099-INT, but you still owe tax on that interest.
  • High-yield savings accounts earn more interest than traditional accounts, which means higher tax bills on the interest you earn.

When the bank sends you a 1099-INT form

Your bank is required to send you a 1099-INT if you earned $10 or more in interest during the calendar year. The form arrives by January 31 and shows the total interest paid to your account. You receive one copy, and the bank sends a copy to the IRS. If you have accounts at multiple banks, you will receive a separate 1099-INT from each one.

The form lists the account number, the bank's name and address, and the exact dollar amount of interest earned. If you earned interest in a joint account, the bank typically reports the full amount to the primary account holder, though you can ask the bank to split it between owners. Keep the 1099-INT with your tax documents — you will need it when you file.

What happens if you earned less than $10 in interest

If your savings account earned less than $10 in interest during the year, the bank does not have to send you a 1099-INT. However, you still owe federal income tax on that interest. You report it on your tax return even without the form. The IRS does not receive a report from the bank, but that does not mean the income is invisible — if you do not report it and the IRS later discovers the omission, you can face penalties and interest charges on the unpaid tax.

This situation is most common with traditional savings accounts earning very low interest rates, or with accounts that were opened late in the year. High-yield savings accounts almost always generate enough interest to trigger a 1099-INT.

How state taxes affect your savings interest

Most states tax interest income as part of their regular income tax. Your state tax return asks for the same interest income you reported to the federal government, and you pay state tax on it at your state's rate. A few states do not tax interest income at all: Illinois, Mississippi, Tennessee, and South Carolina exempt interest from state income tax, though they may tax other types of income. If you live in one of these states, you still owe federal tax on savings interest, but you skip the state portion.

Some states offer tax breaks for interest earned on certain types of savings accounts or for residents over a certain age. Check your state's tax authority website or ask a tax preparer whether your state has any special rules for savings interest.

The difference between high-yield and traditional savings accounts

A high-yield savings account pays significantly more interest than a traditional savings account — sometimes 4 to 5 percent annually compared to 0.01 percent or less at a traditional bank. That higher interest means a larger tax bill. Someone with $50,000 in a high-yield account earning 4.5 percent annually earns $2,250 in interest, while the same $50,000 in a traditional account earning 0.01 percent earns only $5 in interest. The tax on that $2,250 is much larger than the tax on $5.

This does not mean high-yield accounts are a bad choice — the higher interest still leaves you ahead of inflation and ahead of traditional accounts. But it does mean you should expect a higher tax bill and plan accordingly. Some people move money to high-yield accounts late in the year specifically to minimize the interest earned in that tax year, though this strategy only works if you can afford to keep the money elsewhere for part of the year.

How to report savings interest on your tax return

When you file your federal tax return, you report savings interest on Schedule B (Interest and Ordinary Dividends) if you earned more than $1,500 in interest and dividends combined. If you earned $1,500 or less, you can report the interest directly on Form 1040 without using Schedule B. You enter the total interest from all your 1099-INT forms and any interest the bank did not report.

The interest amount flows into your total income, which determines your tax bracket and the amount of tax you owe. If you use tax software, it usually walks you through entering the 1099-INT information and calculates the tax automatically. If you file by hand or with a tax preparer, bring all your 1099-INT forms and any documentation of unreported interest.

What to do if your 1099-INT shows the wrong amount

If the 1099-INT from your bank lists an incorrect interest amount, contact the bank immediately and ask them to issue a corrected form. The bank will send you a corrected 1099-INT marked as such, and they will also send a corrected copy to the IRS. You must file your tax return using the corrected amount, not the original.

If you discover the error after you have already filed your return, you can file an amended return using Form 1040-X. The IRS will adjust your tax liability based on the correct interest amount. Keep documentation from the bank showing the error and the correction — this protects you if the IRS questions the amendment.

Frequently Asked Questions

Do I have to pay taxes on the interest if I do not spend it?

Yes. The tax is owed on interest earned, not on interest spent. Even if you leave the interest in the account and never withdraw it, you owe tax on it in the year it was earned. The IRS taxes income when it is earned, not when you use it.

Can I avoid taxes by moving money between savings accounts?

No. Moving money between your own accounts does not change the interest earned or the tax owed. The bank reports interest based on the account balance and the rate paid, regardless of how many times you move money in or out. Only the interest itself is taxable, not the principal.

What if I earned interest in a joint savings account?

The bank typically reports the full interest amount on a 1099-INT to the primary account holder. You and the other owner can split the reported interest however you agree, but one of you must report it on a tax return. If you split it, keep documentation of the agreement in case the IRS questions why you reported less than the 1099-INT shows.

Does a certificate of deposit get taxed the same way as a savings account?

Yes. Interest from a CD is reported on a 1099-INT just like savings account interest, and you owe the same federal and state income tax on it. Some CDs allow you to defer reporting interest until the CD matures, but most require you to report interest annually even if you do not withdraw it.

What if I closed my savings account during the year?

You still owe tax on all the interest earned in that account during the year, even if you closed it before the end of the year. The bank will still send you a 1099-INT showing the interest earned through the closing date. Report it on your tax return as usual.