Interest Income Is Taxable; The Deposit Itself Is Not
You do not pay federal income tax on the money you deposit into a savings account — that money is yours already, and you have already paid tax on it when you earned it. You do pay tax on the interest your bank pays you. If your savings account earned $50 in interest last year, that $50 is taxable income. The deposit of $5,000 is not.
The IRS treats savings account interest as ordinary income, taxed at your regular income tax rate. If you are in the 22% tax bracket, that $50 in interest costs you about $11 in federal tax. State income tax applies too in most states, though a handful do not tax interest income.
Your bank reports this interest to the IRS on a Form 1099-INT if you earned $10 or more in interest during the year. You receive a copy in January or early February. You must report this amount on your tax return even if you do not receive the form — the IRS has a copy.
Key Takeaways
- Interest earned in a savings account is taxable income reported on your federal tax return; the original deposit is not.
- Your bank sends you a Form 1099-INT if you earned $10 or more in interest during the tax year.
- Interest is taxed as ordinary income at your regular tax rate, and most states tax it as well.
- High-yield savings accounts earn more interest, which means more tax owed, but the after-tax return is usually still higher than traditional savings accounts.
- You can reduce taxable interest by holding money in tax-advantaged accounts like IRAs or 529 plans, depending on your situation.
When Your Bank Sends You a 1099-INT Form
The 1099-INT is the form your bank uses to report interest to both you and the IRS. You will receive it by January 31 of the year following the tax year in which you earned the interest. If you earned interest in 2024, you get the form in January 2025.
Banks are required to send this form only if interest reaches $10 or more. If you earned $8 in interest, your bank may not send a form, but you still owe tax on that $8. Check your account statements to find all interest earned, even if no form arrives.
The form shows the account number, the total interest paid, and sometimes other types of income like dividends if the account held investments. Report the interest amount on Schedule 1 (Form 1040) under "Interest" when you file your federal return.
How Interest Rates Affect Your Tax Bill
Higher interest rates mean more interest earned, which means a larger tax bill. A high-yield savings account might pay 4% to 5% annually, while a traditional savings account pays 0.01%. On $10,000, the difference is roughly $400 to $500 per year in additional interest — and therefore additional taxable income.
Even so, a high-yield account usually leaves you ahead after taxes. If you earn $500 in interest and owe $110 in federal tax (at 22%), you keep $390. A traditional account earning $10 in interest costs you about $2.20 in tax, leaving you $7.80. The high-yield account still wins by a wide margin.
Interest rates change frequently. When the Federal Reserve raises rates, banks typically raise savings rates within weeks. When rates fall, savings rates drop more slowly. Check your bank's current rate before opening an account if tax-efficient growth matters to you.
Tax-Advantaged Alternatives to Regular Savings Accounts
If you want to save money without paying tax on the interest, certain accounts shield earnings from federal tax. An Individual Retirement Account (IRA) — either traditional or Roth — lets you save for retirement with tax-deferred or tax-free growth. A 529 plan lets you save for education expenses with tax-free growth if you use the money for may have access to education costs.
These accounts have rules. An IRA has annual contribution limits (currently $7,000 for those under 50) and penalties if you withdraw before age 59½, with some exceptions. A 529 plan is tied to education expenses; withdrawals for other purposes trigger tax and a 10% penalty on earnings. Money in these accounts also cannot be accessed as easily as a regular savings account.
For money you need to access within a few years, a regular savings account is usually the right choice despite the tax on interest. For longer-term goals, tax-advantaged accounts often make sense even with their restrictions.
State Income Tax on Savings Interest
Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, not wages).
If you live in a state with income tax, you report the same interest amount on your state return that you reported to the IRS. Some states offer small deductions or exemptions for interest earned by seniors or low-income residents, but these are rare and usually modest.
If you move to a different state during the year, you may owe tax to both states on a portion of the interest. The rules vary by state. Contact your state's tax authority or a tax professional if you moved mid-year.
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 discrepancy. They may send you a notice asking you to file an amended return and pay the tax owed plus interest and penalties.
The penalty for underpayment of tax is typically 20% of the unpaid tax, plus interest calculated daily. If the IRS determines the omission was intentional, the penalty can be higher. Even small amounts of unreported interest can trigger a notice.
If you made an honest mistake, filing an amended return as soon as you realize the error reduces penalties. The IRS is more lenient with taxpayers who correct errors voluntarily than with those caught during an audit.
How to Report Savings Interest on Your Tax Return
Reporting interest is straightforward. On your federal return, you use Schedule 1 (Form 1040), which is filed with your main 1040 form. Line 8 of Schedule 1 is labeled "Interest." Enter the total interest from all your savings accounts, checking accounts, money market accounts, and CDs.
If you use tax software, the program will ask you to enter the interest amount from your 1099-INT forms. It automatically places the total on the correct line. If you file by hand, add up all interest from all 1099-INT forms and write the total on Schedule 1, Line 8.
Keep copies of all 1099-INT forms you receive for at least three years in case the IRS asks questions. You do not mail the forms with your return; the IRS receives them directly from your bank.
Frequently Asked Questions
Do I owe tax on interest if I earned less than $10?
Yes. Your bank only sends a 1099-INT if interest reaches $10 or more, but you owe tax on all interest earned, no matter the amount. Check your account statements and report any interest on your return, even if you did not receive a form.
Can I deduct savings account fees from my taxable interest?
No. Savings account fees are not deductible. You report the full interest amount as income. If your bank charges a $5 monthly fee, you still report the interest earned, and the fee comes out of your pocket separately.
What if I have multiple savings accounts at different banks?
Add up the interest from all accounts and report the total on your tax return. Each bank sends its own 1099-INT if interest reaches $10. If you have five accounts earning $3 each, no bank sends a form, but you still owe tax on the $15 total.
Does a joint savings account change how I report interest?
If the account is jointly owned, the bank reports the full interest on one 1099-INT. You and the other owner must decide how to split the income for tax purposes — usually 50/50 unless you have a different agreement. Each person reports their share on their own return.
Is interest from a CD taxed the same way as a savings account?
Yes. Interest from a certificate of deposit (CD) is taxed as ordinary income just like savings account interest. Your bank reports CD interest on a 1099-INT. Some CDs require you to report interest each year even if you do not withdraw it until maturity.