You pay federal income tax on savings account interest, but not on the money you deposit
The money you put into a savings account is yours — you do not owe tax on it. But the interest your bank pays you counts as income, and you report it on your federal tax return each year. The amount of tax you owe depends on how much interest you earned and your overall income for the year.
Your bank will send you a form called a 1099-INT (Interest Income) if you earned $10 or more in interest during the year. You use this form to report the interest on your federal return. Some states also tax savings interest, though the rules vary by state.
The tax is owed whether the interest is small or large. A savings account earning 4% on $1,000 generates $40 in taxable interest. A high-yield savings account earning the same rate on $50,000 generates $2,000 in taxable interest — and that $2,000 is income you must report.
Key Takeaways
- Your bank sends you a 1099-INT form if you earned $10 or more in interest during the year, and you report that interest as income on your federal tax return.
- The interest rate your account earns, the balance you hold, and your tax bracket all affect how much tax you owe on savings interest.
- Some states tax savings interest and some do not — check your state's rules if you live in a state with an income tax.
- You can reduce taxable interest by holding money in tax-advantaged accounts like Roth IRAs or 529 plans, though these have contribution limits and withdrawal rules.
How the 1099-INT form works and when you receive it
Banks and credit unions issue a 1099-INT for each account that earned $10 or more in interest during the calendar year. You receive the form by January 31 of the following year. The form shows the total interest paid to you during that year.
You receive one 1099-INT per account if you have multiple savings accounts at the same institution, though some banks combine interest from all your accounts into a single form. If you have accounts at different banks, each bank sends its own 1099-INT.
The IRS also receives a copy of your 1099-INT. When you file your tax return, you report the interest shown on the form. If you do not report it and the IRS notices the mismatch, you may face penalties and interest charges on the unpaid tax.
How much tax you actually owe on savings interest
The tax you owe on savings interest is calculated using your marginal tax rate — the percentage rate that applies to your highest income. If you earn $50,000 a year and are single, your marginal rate is 12% for 2024. If you earn $200,000, your marginal rate is 24%. The more you earn overall, the higher the rate applied to your interest income.
Example: You earn $50,000 in wages and $500 in savings interest. Your marginal rate is 12%, so you owe roughly $60 in federal tax on that interest ($500 × 0.12). If you earn $200,000 in wages and the same $500 in interest, you owe roughly $120 on that interest ($500 × 0.24).
This is why high-income earners feel the tax on savings more sharply than lower-income earners — the same $500 in interest costs them more in tax because it is taxed at a higher rate. Some people with very low income may owe no federal tax at all on their interest if their total income falls below the filing threshold.
State taxes on savings account interest
Nine states do not tax income 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 one of these states, you owe no state tax on your savings interest.
All other states tax interest income, though the rates and rules vary. Some states tax interest at the same rate as wages. Others have a separate, lower rate for investment income. A few states allow a small deduction or exemption for interest earned on savings accounts held by residents.
You report state interest income on your state tax return, usually on a form similar to the federal return. Your 1099-INT shows the total interest, and you use that same figure for both federal and state reporting. Check your state's tax website or speak with a tax preparer to understand your state's specific rules.
Tax-advantaged accounts that shield savings from tax
Certain accounts let you earn interest without paying tax on it each year. A Roth IRA lets you contribute up to $7,000 per year (or $8,000 if you are 50 or older), and all interest earned inside the account is tax-free as long as you follow withdrawal rules. A 529 education savings plan works the same way for money saved for college or K-12 education.
A traditional IRA defers the tax — you do not pay tax on interest earned inside the account, but you pay tax on withdrawals in retirement. A Health Savings Account (HSA) allows tax-free interest if the money is used for medical expenses.
These accounts have limits on how much you can contribute each year and rules about when you can withdraw the money without penalty. They are most useful if you have a stable income and can leave the money untouched for years. For most people, a regular savings account is simpler, even though the interest is taxable.
What to do if you did not receive a 1099-INT but earned interest
If you earned less than $10 in interest during the year, your bank is not required to send you a 1099-INT. You still owe tax on that interest, though — you must report it on your return even without the form. Add up the interest from your statements and report the total.
If you earned $10 or more and did not receive a 1099-INT by early February, contact your bank. The form may have been mailed to an old address, or the bank may have made an error. Ask the bank to issue a corrected form or provide a statement showing the interest paid.
If you received a 1099-INT but believe the amount is wrong, ask your bank to investigate. Banks sometimes make errors in calculating or reporting interest. If the bank confirms an error, it will issue a corrected 1099-INT (marked as a correction) that you use instead of the original.
How interest rates affect your tax bill
Higher interest rates mean more interest earned, which means more tax owed. When the Federal Reserve raised rates from near zero in 2022 to over 5% by 2023, savers began earning meaningful interest for the first time in years — and many discovered they owed tax on amounts they had not expected.
A savings account with $10,000 earning 0.01% interest generates $1 in annual interest (no 1099-INT required). The same account earning 4.5% generates $450 in interest (taxable). At a 24% marginal rate, that is $108 in federal tax owed.
This does not mean you should avoid high-yield savings accounts. The interest you earn still exceeds the tax you pay. But it is worth understanding that as rates rise, your tax bill rises too. If you are in a high tax bracket, moving some money to a tax-advantaged account may reduce your overall tax burden.
Frequently Asked Questions
Do I have to report savings interest if I earned less than $10?
Yes. Your bank does not send a 1099-INT for interest under $10, but you still owe tax on it. Add up the interest from your account statements and report the total on your return, even if it is $5 or $8.
What if I have savings at multiple banks?
Each bank sends its own 1099-INT if you earned $10 or more at that bank. You report the interest from each form on your tax return. The IRS receives copies of all of them, so make sure your return includes all the interest you earned across all accounts.
Can I deduct the tax I pay on savings interest?
No. Interest income is taxed as ordinary income, and you cannot deduct the tax itself. You can deduct investment expenses in some cases, but not the tax owed on the earnings.
Does moving money between my savings accounts create a tax event?
No. Moving money from one account to another is not taxable. Only the interest your bank pays you is taxable. Transfers between your own accounts do not trigger any tax.
What happens if I do not report savings interest on my tax return?
The IRS receives a copy of your 1099-INT. If you do not report the interest and the IRS notices, you may owe the unpaid tax plus penalties and interest charges. It is simpler to report it when you file.