Yes, you pay federal income tax on savings account interest, and sometimes state tax too

The interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or other money you receive — you owe federal income tax on it. Most states also tax savings interest as part of your state income tax, though a few do not. The amount you owe depends on how much interest you earned and your overall income for the year.

Your bank reports the interest to the IRS on a form called a 1099-INT, which you receive by January 31 each year. You then report that same amount on your federal tax return. If you earned less than $10 in interest during the year, your bank may not send a 1099-INT, but you still owe tax on it if you file a return.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax rate, which ranges from 10% to 37% depending on your total income.
  • Your bank sends you a 1099-INT form by January 31 showing how much interest you earned, and you report this on your tax return.
  • Most states tax savings interest as part of state income tax, but Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not have state income tax.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means you owe more tax on the earnings, but the after-tax return is usually still higher.
  • If you have multiple savings accounts, the bank reports interest from each account separately, but you combine all interest income when you file your taxes.

How the tax rate on savings interest works

The tax rate you pay on savings interest depends on your tax bracket — the percentage of your income that goes to federal tax. If you earn $11,000 to $44,725 in 2024 as a single filer, you are in the 12% bracket, so you pay 12% federal tax on your savings interest. If you earn $44,726 to $95,375, you are in the 22% bracket, and so on. The highest bracket is 37% for income over $578,100.

This matters because earning $500 in interest does not cost you $500 in taxes. It costs you 12% of $500 (or $60) if you are in the 12% bracket, or 22% of $500 (or $110) if you are in the 22% bracket. The more you earn overall, the higher your tax bracket and the more you owe on the same interest income.

State tax works the same way. If your state has a 5% income tax and you earn $500 in interest, you owe $25 in state tax on top of your federal tax. Some people in high-income brackets can owe 40% or more of their interest earnings in combined federal and state tax.

When you receive the 1099-INT and how to use it

Your bank mails or emails you a 1099-INT by January 31 for any interest you earned in the previous calendar year. The form shows the account number, the bank's name, and the total interest paid. If you have savings accounts at multiple banks, you will receive a separate 1099-INT from each one.

When you file your tax return, you report the interest from all your 1099-INT forms on Schedule B (if you have more than $1,500 in interest income) or directly on your 1040 form (if you have $1,500 or less). You add up all the interest from all accounts and report the total as one line item. The IRS receives a copy of your 1099-INT from the bank, so they know how much you earned and will flag your return if you do not report it.

If you earned less than $10 in interest, your bank does not have to send you a 1099-INT. However, you still owe tax on that interest if you file a return. Keep your own records of small interest amounts so you can report them accurately.

States that do and do not tax savings interest

Eight states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe no state tax on your savings interest, only federal tax.

Every other state taxes savings interest as part of state income tax. The rate varies — some states charge 3%, others charge 8% or more. A few states offer small exemptions or deductions for interest income, but these are rare and usually apply only to retirees or people over a certain age. Check your state's tax website or ask a tax preparer if you are unsure whether your state taxes savings interest.

High-yield savings accounts and the tax trade-off

A high-yield savings account earns 4% to 5% annual interest, compared to 0.01% to 0.5% at a traditional bank savings account. This means you earn much more money, but you also owe much more tax on that money. If you earn $500 in a traditional account and owe 22% federal tax, you pay $110 in tax and keep $390. If you earn $2,500 in a high-yield account and owe 22% federal tax, you pay $550 in tax and keep $1,950. Even after tax, the high-yield account leaves you with more money.

The tax on high-yield savings is still ordinary income tax — there is no special lower rate for interest earnings. But the higher earnings usually make the after-tax return worth it, especially if you have a large balance. A $10,000 balance in a high-yield account earning 4.5% gives you $450 in interest per year; after 22% federal tax and 5% state tax, you keep about $330. The same $10,000 in a traditional account earning 0.1% gives you $10 in interest; after tax, you keep about $7.

What to do if you did not receive a 1099-INT

If you earned interest but did not receive a 1099-INT by early February, contact your bank. The bank may have the wrong mailing address or email on file, or the interest may have been credited after the bank sent out forms. Ask the bank to send you a corrected or duplicate 1099-INT, or ask for a statement showing the interest earned.

If you cannot get a 1099-INT from the bank, you can still report the interest on your tax return. Look at your account statements from December and January to find the total interest credited during the year. Report this amount on your return even without the form. The IRS may contact you if the bank reported interest that you did not report, so it is important to include all interest income.

If you moved or changed banks during the year, you may receive multiple 1099-INTs from different institutions. Add up the interest from all of them and report the total on your return. Do not report each form separately — combine them into one line item.

Tax-advantaged alternatives to regular savings accounts

If you want to save money without paying tax on the earnings every year, you have other options. A traditional IRA or 401(k) lets you save money and earn interest without owing tax on the interest until you withdraw the money in retirement. A Roth IRA lets you save money and earn interest completely tax-free, as long as you follow the withdrawal rules. A 529 college savings plan lets you save for education expenses and avoid tax on the earnings if you use the money for tuition, room, and board.

These accounts have limits on how much you can contribute each year and rules about when you can withdraw the money. But if you are saving for a specific goal — retirement, education, or a major purchase years away — these accounts can save you thousands in taxes compared to a regular savings account.

Frequently Asked Questions

Do I owe tax on savings interest if I do not file a tax return?

If you earned interest, you owe tax on it whether or not you file a return. However, if your total income is below the filing threshold (which varies by age and filing status), you may not be required to file. Check the IRS website or ask a tax preparer whether you have to file based on your income and situation.

Can I deduct savings account fees from my interest income?

No. You report the full interest amount on your tax return, and you cannot subtract fees, penalties, or other costs. However, if you paid investment fees or tax preparation fees, you may be able to deduct those separately on Schedule A, though the rules are strict and most people do not benefit.

What if I earned interest in a joint savings account?

The bank reports the full interest on a 1099-INT to the person whose Social Security number is listed first on the account. That person reports all the interest on their tax return. If you and the other account holder want to split the tax burden, you will need to file an amended return or work with a tax preparer to report your share correctly.

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

Yes. Money market accounts, savings accounts, and certificates of deposit (CDs) all earn interest that is taxed as ordinary income. Your bank reports the interest on a 1099-INT, and you report it on your tax return the same way you would for a savings account.

Can I avoid paying tax on savings interest by keeping my balance under a certain amount?

No. You owe tax on all interest you earn, regardless of your account balance. Even $1 in interest is taxable income. The only way to avoid tax on savings interest is to keep your money in an account that earns no interest, or to use a tax-advantaged account like an IRA or 529 plan.