Yes, you owe federal income tax on savings account interest, and most states tax it too
The interest your bank pays you on a savings account counts as income to the IRS. You report it on your federal tax return every year, and you pay income tax on it at your ordinary tax rate — the same rate you pay on wages or salary. Most states also tax savings interest as part of your state income tax, though a few states do not.
The amount of tax you owe depends on how much interest you earned and your total income for the year. If you earned less than $10 in interest, your bank does not have to report it to the IRS, but you still owe tax on it if you file a return. If you earned $10 or more, your bank sends you a 1099-INT form in January showing the amount, and the IRS gets a copy too.
You do not pay tax on the money you put into the account — only on the interest it earns. If you deposited $5,000 and earned $50 in interest, you owe tax only on the $50.
Key Takeaways
- Savings account interest is taxed as ordinary income at your federal tax rate, and you report it on your tax return every year.
- Banks send you a 1099-INT form if you earned $10 or more in interest during the year, and the IRS receives a copy.
- Most states tax savings interest as part of state income tax, but New Hampshire and Tennessee do not tax interest income.
- You owe tax on interest even if you do not receive a 1099-INT, so keep your own records if your interest is under $10.
- High-yield savings accounts earn more interest, which means you owe more tax, but the after-tax return is usually still higher than traditional savings accounts.
How the IRS finds out about your interest income
Your bank reports interest to the IRS using Form 1099-INT. The bank sends you a copy and files another copy with the IRS. The IRS then matches what you report on your tax return against what the bank reported. If you do not report the interest, the IRS will notice the mismatch.
If you earned less than $10 in interest during the year, your bank is not required to send you a 1099-INT or report it to the IRS. However, you still owe tax on that interest if you file a return. Keep your own records — your monthly statements show how much interest you earned each month.
Banks typically send 1099-INT forms by January 31 each year for interest earned in the previous calendar year. If you do not receive one by early February, contact your bank to ask whether one was issued.
What tax rate applies to your savings interest
Savings interest is taxed at your ordinary income tax rate, which is the same rate that applies to your wages, salary, or self-employment income. That rate depends on your total income for the year and your filing status. If you are in the 22% tax bracket, you pay 22% tax on your interest. If you are in the 12% bracket, you pay 12%.
This is different from long-term capital gains, which are taxed at lower rates. Savings interest gets no special treatment — it is ordinary income all the way.
Your employer does not withhold tax from interest payments the way they withhold from your paycheck. You pay the tax when you file your return, or you can ask your bank to withhold tax on your interest if you want to. Most people do not ask for withholding and instead pay the tax at tax time.
State taxes on savings account interest
Most states tax savings interest as part of their state income tax. The rate varies by state — some states tax it at the same rate as federal income tax, others at a different rate. A few states do not tax interest income at all.
New Hampshire and Tennessee do not tax interest income or dividend income, though they do tax other forms of income. If you live in one of these states, you owe federal tax on your savings interest but not state tax. If you live in any other state with an income tax, you owe state tax on the interest too.
If you moved during the year or earned interest in a state where you do not live, you may owe tax to more than one state. Your tax software or tax preparer can help you figure out which state forms you need to file.
How much tax you actually owe on your interest
The tax you owe is your tax rate multiplied by the amount of interest you earned. If you earned $200 in interest and you are in the 22% federal tax bracket, you owe $44 in federal tax on that interest. If your state taxes interest at 5%, you owe another $10 in state tax.
High-yield savings accounts currently earn between 4% and 5% annual interest, depending on the bank and the current rate environment. A traditional savings account might earn 0.01% to 0.05%. The difference in interest earned is significant, but so is the difference in tax owed. If you have $10,000 in a high-yield account earning 4.5%, you earn $450 per year. At a 22% federal tax rate, you owe $99 in federal tax. Your after-tax return is $351. In a traditional account earning 0.05%, you earn $5 per year and owe about $1 in tax, leaving you $4.
Even after taxes, the high-yield account comes out ahead. The higher interest rate more than makes up for the higher tax bill.
When you might owe estimated tax payments
If you have a large savings account earning a lot of interest, or if you have other sources of income not subject to withholding, you might owe estimated tax payments during the year instead of waiting until tax time.
Estimated tax is required if you expect to owe $1,000 or more in federal tax for the year and you do not have enough tax withheld from other income. You make four quarterly payments — on April 15, June 15, September 15, and January 15 of the following year. The IRS provides Form 1040-ES to help you calculate what you owe.
Most people with savings accounts do not earn enough interest to trigger estimated tax. But if you have a very large balance or multiple accounts, ask a tax preparer whether you need to make estimated payments.
Reporting savings interest on your 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 during the year. If you earned $1,500 or less, you can report the interest directly on Form 1040 without filing Schedule B.
Your tax software will ask you for the amount of interest you earned. Enter the amount shown on your 1099-INT form. If you earned interest from multiple banks, add them all together and report the total.
If you earned interest but did not receive a 1099-INT because it was under $10, you still report it on your return. Use your bank statements to figure out the total amount.
Frequently Asked Questions
Do I have to report interest under $10?
Yes, you owe tax on all interest you earn, even if it is under $10 and your bank does not send you a 1099-INT. Your bank is not required to report interest under $10 to the IRS, but you are still required to report it on your tax return if you file one. Keep your monthly statements as proof of the amount.
Can I avoid paying tax on savings interest?
No, there is no legal way to avoid income tax on savings interest. You can reduce the amount of interest you earn by keeping less money in savings, but any interest you do earn is taxable. Some people use tax-advantaged accounts like Roth IRAs or 529 plans, which have different tax rules, but regular savings accounts are always taxed.
What if I earned interest in two different states?
You report all interest on your federal return regardless of which state it was earned in. For state taxes, you typically owe tax to the state where you lived when you earned the interest. If you moved during the year, you may owe tax to both states. Your tax software can help you file returns to multiple states if needed.
Is the interest my bank pays me the same as what I report on my taxes?
Usually yes, but not always. Your bank calculates interest daily and deposits it monthly or quarterly. The 1099-INT form shows the total interest credited to your account during the calendar year. If you closed the account mid-year, the 1099-INT shows only the interest earned up to that point. Check your 1099-INT against your statements to make sure the amount is correct.
Do I owe tax on money I transfer between my own savings accounts?
No. Transferring money between your own accounts is not income — you are just moving money you already own. You owe tax only on the interest the money earns, not on the transfers themselves.