Yes, you owe federal income tax on savings account interest

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 earn. You report it on your federal tax return each year, and depending on how much interest you earned and your total income, you may owe federal income tax on it. Some states also tax savings interest.

The amount of tax you pay depends on your tax bracket — the percentage rate applied to your income. If you earned $500 in interest and you're in the 22% tax bracket, you would owe roughly $110 in federal tax on that interest (before any deductions or credits). If you're in the 12% bracket, you'd owe roughly $60. The more interest you earn, the more tax you owe.

Your bank will send you a form called a 1099-INT if you earned $10 or more in interest during the year. You use this form to report the interest on your tax return. Even if you don't receive a 1099-INT, you still owe tax on any interest you earned — the bank's reporting threshold doesn't change your tax obligation.

Key Takeaways

  • Savings account interest counts as taxable income on your federal tax return, and you report it using the 1099-INT form your bank sends you.
  • The tax you owe on interest depends on your tax bracket; higher earners pay a larger percentage of their interest in taxes.
  • Some states tax savings interest in addition to federal tax, so check your state's rules if you live in a state with income tax.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw the money, but interest in a regular savings account is taxed every year.
  • High-yield savings accounts earn more interest than regular savings accounts, which means you'll owe more tax on the earnings.

When the bank sends you a 1099-INT form

Your bank mails or emails you a 1099-INT by January 31 each year if you earned $10 or more in interest during the previous calendar year. This form shows the total interest paid to you. You receive one copy and the IRS receives another, so the agency already knows how much interest you earned before you file your return.

If you have multiple savings accounts at different banks, you'll receive a separate 1099-INT from each bank. You add up all the interest reported on all your 1099-INT forms and report the total on your tax return. The IRS matches what you report against the copies the banks sent them, so underreporting interest can trigger an audit notice.

If you earned less than $10 in interest, your bank may not send you a 1099-INT, but you still owe tax on that interest. Keep your own records of interest earned so you can report it accurately.

Federal tax brackets and how much you'll owe

The percentage of tax you pay on savings interest depends on your total income for the year and your filing status. The IRS publishes tax brackets each year that change slightly. For 2024, if you're single and your total income falls between roughly $11,600 and $47,150, you're in the 12% tax bracket. If your income is between $47,150 and $100,525, you're in the 22% bracket.

This means if you earned $1,000 in savings interest and you're in the 12% bracket, you'd owe approximately $120 in federal tax on that interest (before any deductions or credits reduce your tax). If you're in the 22% bracket, you'd owe roughly $220. The higher your income, the higher your tax bracket, and the more tax you pay on the same amount of interest.

These are federal rates only. Your state may add additional tax on top of the federal amount. Nine states have no income tax at all, so residents of those states pay only federal tax on savings interest. Other states tax savings interest at rates ranging from roughly 1% to 13%, depending on the state and your income level.

State income tax on savings interest

If you live in a state with an income tax, that state likely taxes your savings interest as well. States that tax savings interest include California, New York, Illinois, Massachusetts, and most others. The state tax rate varies by state and sometimes by your income level within that state.

Nine states have no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividend and interest income, but has a tax-free threshold). If you live in one of these states, you owe federal tax on savings interest but no state tax.

If you live in a state with income tax, check your state's tax agency website or ask a tax preparer what rate applies to your income level. Some states offer deductions or credits that reduce the tax on savings interest, particularly for older residents or lower-income households.

Tax-advantaged accounts that defer or avoid interest tax

A traditional IRA or 401(k) allows interest to grow without being taxed each year. You don't report the interest on your tax return while the money is in the account. Instead, you pay tax on the entire withdrawal when you take the money out in retirement. This can be advantageous if you expect to be in a lower tax bracket in retirement than you are now.

A Roth IRA works differently: you pay tax on the money before you put it in, but the interest grows tax-free and you owe no tax when you withdraw it in retirement. If you expect to be in a higher tax bracket later, a Roth IRA can save you money.

A high-yield savings account in a regular bank account (not an IRA or 401(k)) still requires you to pay tax on the interest each year, even though the interest rate is higher than a traditional savings account. The tax advantage comes from the account type (IRA, 401(k), Roth), not from the interest rate.

If you have a large amount of savings and expect to earn significant interest, talk to a tax preparer or financial advisor about whether a tax-advantaged account makes sense for your situation.

How to report savings interest on your tax return

When you file your federal 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. If you earned $1,500 or less, you can report the interest directly on Form 1040 without using Schedule B.

You enter the total interest from all your 1099-INT forms on the appropriate line. If you received a 1099-INT from your bank, use the amount shown on that form. If you earned interest but didn't receive a 1099-INT (because it was under $10), add that amount to your total as well.

The interest you report is added to your other income for the year, which may push you into a higher tax bracket. This is one reason why high earners sometimes see their tax rate increase when they earn significant interest — the interest itself is taxed at their marginal rate, which can be higher than their average rate.

What happens if you don't report savings interest

The IRS receives a copy of every 1099-INT your bank sends you. If you don't report the interest on your tax return, the IRS will notice the discrepancy when it matches your return against the 1099-INT forms on file. This can trigger a notice asking you to explain the difference or pay the tax owed plus penalties and interest.

If the IRS determines you intentionally underreported income, you may face penalties of 20% or more of the unpaid tax, plus interest calculated from the original due date. The interest compounds daily, so the longer you wait to correct the error, the more you owe.

If the underreporting was unintentional, you can file an amended return (Form 1040-X) to correct it. The sooner you file the amendment, the less interest will accrue on the unpaid tax.

Frequently Asked Questions

Do I owe tax on savings interest if I'm retired?

Yes, retirement doesn't change your tax obligation on savings interest. You report it the same way as anyone else. However, if your total income is below a certain threshold (which varies by age and filing status), you may not owe federal income tax at all. The IRS publishes standard deduction amounts each year that determine whether you must file a return.

What if I earned interest in a money market account instead of a savings account?

Money market accounts are taxed the same way as savings accounts. The interest is reported on a 1099-INT and you owe federal and state income tax on it. The account type doesn't matter — only whether it's a tax-advantaged account like an IRA.

Can I deduct savings account fees from the interest I report?

No, you report the gross interest amount shown on your 1099-INT. You cannot subtract fees or other expenses related to the account. However, if you paid investment advisory fees or other expenses to manage your investments, those may be deductible under certain circumstances — ask a tax preparer about your specific situation.

Do I owe tax on interest if I'm under 18?

Yes, minors owe tax on savings interest the same way adults do. However, a minor's parent or guardian may be able to report the interest on their own return under certain conditions (called the "kiddie tax" rules). Talk to a tax preparer about whether this applies to your situation.

What if my savings account earned less than $1 in interest?

You still owe tax on it, even if it's just a few cents. The amount is so small that it usually doesn't change your tax liability, but technically you're required to report all interest earned. Your bank won't send a 1099-INT for amounts under $10, so you'll need to track it yourself.