Yes, the interest your savings account earns is taxed as income

The money you deposit into a savings account is yours and not taxed. But the interest the bank pays you on that money counts as income to the IRS, and you owe federal income tax on it. Most states tax it too. The bank will send you a form called a 1099-INT each January showing how much interest you earned the previous year, and you report that amount on your tax return.

The tax rate depends on your overall income and tax bracket — the same way wages are taxed. If you earned $500 in interest and you're in the 22% tax bracket, you'll owe roughly $110 in federal tax on that interest (though state tax may apply on top). If you earned $50, you'll owe less. The bank doesn't automatically withhold the tax; you pay it when you file your return.

Key Takeaways

  • Interest earned in a savings account is taxed as ordinary income at your federal tax rate, plus state income tax in most states.
  • Banks report interest of $10 or more on a 1099-INT form sent to you and the IRS in January.
  • You report the interest amount on your tax return even if the bank doesn't send you a 1099-INT.
  • High-yield savings accounts earn more interest, which means you'll owe more tax on the earnings.
  • Roth IRAs and certain other retirement accounts hold savings that grow tax-free, but regular savings accounts do not.

When the bank sends you a 1099-INT form

If your savings account earned $10 or more in interest during the year, the bank must send you a 1099-INT by January 31. You'll receive one copy in the mail and the IRS receives another. The form shows the account number, the bank's name, and the exact interest amount.

If you earned less than $10, the bank doesn't have to send a 1099-INT, but you still owe tax on that interest. You'll need to add it to your tax return based on your own records — check your account statements or the year-end summary the bank may provide online.

If you have multiple savings accounts at different banks, you'll receive a separate 1099-INT from each one. Add all the interest amounts together when you file your return.

How to report interest on your tax return

When you file your federal return, you report the interest income on Schedule B (if you use the long form) or directly on Form 1040 (if you use the short form). The exact line depends on which form your tax software or preparer uses, but the concept is the same: you list the bank name, account number, and interest amount.

That interest gets added to your other income — wages, self-employment earnings, investment gains — to calculate your total taxable income. The more interest you earn, the higher your total income, and potentially the higher your tax bracket.

State tax returns work the same way. Most states tax interest income, though a few do not. Check your state's tax agency website to see whether your state taxes savings account interest.

The difference between high-yield and regular savings accounts

A high-yield savings account pays significantly more interest than a traditional savings account at a bank — sometimes 4% to 5% annually, compared to 0.01% or less at a regular account. That higher interest is good for your savings, but it also means you'll owe more tax.

If you have $10,000 in a high-yield account earning 4.5% annually, you'll earn $450 in interest and owe tax on that $450. In a regular savings account earning 0.01%, you'd earn $1 and owe tax on $1. The tax difference is real, but the high-yield account still leaves you ahead because the interest you earn after taxes is still much larger.

The tax treatment is identical — both are reported on a 1099-INT and taxed as ordinary income. The only difference is the amount of interest you earn and therefore the amount of tax you owe.

Tax-advantaged accounts that avoid this tax

Certain retirement and education savings accounts let your money grow without annual tax on the interest. A Roth IRA is the most common example — interest and investment gains inside a Roth IRA are never taxed, as long as you follow the withdrawal rules. A 529 education savings plan works the same way for money saved for college.

These accounts have contribution limits and rules about when you can withdraw the money without penalty. A Roth IRA, for example, limits you to $7,000 per year (as of 2024, though this changes). But if you're saving for retirement or education and want to avoid annual tax on interest, these accounts are worth understanding.

A regular savings account has no contribution limits and no withdrawal restrictions, so it's more flexible. You're just paying tax on the interest each year. The choice depends on your goals and how much you're saving.

What happens if you don't report the interest

The IRS receives a copy of every 1099-INT the bank sends you. If you don't report that interest on your return, the IRS will notice the mismatch between what you reported and what the bank reported. You may receive a notice asking you to pay the tax you owe, plus interest and penalties.

Even small amounts matter. If you earned $50 in interest and didn't report it, the IRS can still send you a bill. The penalty for underreporting income is usually 20% of the unpaid tax, plus interest that compounds daily. It's far simpler to report the interest when you file.

If you realize you missed interest income from a prior year, you can file an amended return using Form 1040-X. The sooner you do this, the less interest and penalty will accrue.

State taxes on savings account interest

Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. A few states do not tax interest at all. New Hampshire and Tennessee, for example, do not tax interest or dividend income, though they tax other forms of income.

If you live in a state that taxes interest, you'll report it on your state tax return using a form similar to the federal Schedule B. The state will use the same 1099-INT the bank sent you.

If you move to a different state during the year, you may owe tax to both states on a portion of the interest. Check your new state's tax rules and file accordingly, or contact the state tax agency for guidance on how to split the income.

Frequently Asked Questions

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

Yes. The bank only has to send you a 1099-INT if you earned $10 or more, but you still owe tax on any interest you earned. Check your account statements and report the interest on your return based on your own records.

Can I deduct savings account interest as a loss?

No. Interest income is taxed, but you cannot deduct it as a loss or expense. The only way to reduce the tax is to earn less interest, which means having less money in the account or moving it to a tax-advantaged account like a Roth IRA.

What if I have a joint savings account with someone else?

The bank will report the full interest amount on a single 1099-INT. You and the other account holder need to decide how to split the interest for tax purposes — usually 50/50, but it depends on how much each person contributed. Report your share on your tax return and give the other person documentation of their share.

Does a money market account get taxed the same way as a savings account?

Yes. Money market accounts earn interest just like savings accounts, and that interest is reported on a 1099-INT and taxed as ordinary income. The tax treatment is identical even though the account type is different.

Is interest from a CD (certificate of deposit) taxed differently?

No. CDs earn interest that is taxed the same way — reported on a 1099-INT and taxed as ordinary income. You report it on your tax return just like savings account interest, even though you can't withdraw the money without penalty until the CD matures.