Interest income is taxable and reported to the IRS

Yes, the interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on it. Your bank will report the interest to both you and the IRS on a Form 1099-INT if you earned $10 or more in interest during the year. You then report that interest on your tax return.

The amount of tax you pay depends on your total income and your tax bracket. If you earned $500 in interest and you're in the 22% tax bracket, you don't automatically owe $110 — instead, that $500 gets added to your other income, and you pay tax on the combined total at your bracket rate. For many people with modest savings, the tax hit is small because interest rates are low and savings balances are modest.

Some states also tax interest income, though a handful do not. Check your state's tax rules if you live in a state with an income tax, because you may owe state tax on top of federal tax.

Key Takeaways

  • Banks report interest of $10 or more to the IRS on Form 1099-INT, and you must report it on your tax return.
  • Interest is taxed as ordinary income at your federal tax bracket rate, not at a special lower rate.
  • You owe tax on interest even if the bank does not withhold it — the bank is not required to hold back tax on savings interest.
  • Some states tax interest income and some do not, so check your state's rules when you file.
  • High-yield savings accounts earn more interest, which means you owe more tax, but the after-tax return is usually still better than a regular savings account.

How the IRS finds out about your interest

Your bank sends a Form 1099-INT to the IRS and mails a copy to you by January 31 each year. The form shows the interest you earned in the previous calendar year. The IRS matches this form against your tax return to make sure you reported the interest. If you don't report it and the IRS sees the 1099-INT, you risk an audit or a notice asking you to pay the tax you missed.

If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add up all the interest from all the forms and report the total on your return. If your total interest is less than $10 for the year, the bank may not send a 1099-INT, but you still owe tax on that interest and should report it.

What tax rate applies to interest income

Interest is taxed as ordinary income, which means it's taxed at the same rate as your wages. If you're single and earn $50,000 in wages plus $1,000 in interest, the IRS treats your taxable income as $51,000 and applies your tax bracket to the full amount. You don't get a special lower rate for interest the way you might for long-term capital gains or may have access to dividends.

Your tax bracket depends on your filing status and total income. For 2024, a single filer in the 12% bracket pays 12% on each additional dollar of interest. Someone in the 22% bracket pays 22%. The higher your income, the higher your bracket, and the more you pay in tax on the interest.

If interest pushes you into a higher tax bracket, only the income in that new bracket is taxed at the higher rate — the rest stays at your previous rate. This is how progressive tax brackets work.

Banks do not withhold tax on savings interest

Unlike wages, where your employer withholds federal income tax automatically, banks do not withhold tax on savings interest. You earn the full amount of interest, and you're responsible for paying the tax when you file your return. This means you might owe money at tax time if you didn't plan for it.

If you know you'll earn significant interest and you want to avoid a surprise tax bill, you can make estimated tax payments to the IRS during the year. Most people with savings interest don't bother because the amount is small, but it's an option if you're earning hundreds or thousands in interest.

High-yield savings accounts and tax

High-yield savings accounts pay much more interest than regular savings accounts — sometimes 4% to 5% annually compared to 0.01% or less at traditional banks. This is good news for your savings, but it means you'll owe more tax. If you have $10,000 in a high-yield account earning 4.5%, you'll earn $450 in interest per year and owe tax on that $450.

Even after taxes, a high-yield account usually leaves you ahead. If you're in the 22% tax bracket, you'd owe about $99 in tax on that $450, leaving you with $351 in after-tax interest. A regular savings account earning 0.01% on the same $10,000 would give you $1 in interest and almost no tax. The high-yield account is still the better deal.

Reporting interest on your tax return

You report interest income on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest and dividends combined. If you have less than $1,500, you can report the total directly on Form 1040 without filing Schedule B. Either way, the interest gets added to your other income and taxed at your bracket rate.

When you file, you'll need the 1099-INT forms from your banks. Match the amounts on the forms to what you report on your return. If you have multiple 1099-INTs, add them all up and report the total.

State taxes on interest income

Most states with an income tax also tax interest income the same way the federal government does — as ordinary income at your state tax bracket. A handful of states do not tax interest: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax at all. New Hampshire and Tennessee tax only interest and dividends, not wages.

If you live in a state that taxes interest, check your state's tax form to see where to report it. Some states use a form similar to the federal Schedule B; others have their own interest reporting line on the main state return.

Frequently Asked Questions

Do I owe tax on interest if I earned less than $10?

Yes. The $10 threshold is only for whether the bank sends you a 1099-INT form. You still owe tax on any interest you earned, even if it's $1. Report it on your return.

What if I move money between accounts during the year?

Interest is taxed based on when you earned it, not when you moved the money. If you earned $200 in interest at Bank A and then moved the balance to Bank B, you still owe tax on the $200. Each bank reports only the interest it paid you.

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

No. You report the full interest amount on your tax return. Savings account fees are not deductible for most people. Report the gross interest the bank paid you, not the net after fees.

Does a CD earn interest that gets taxed?

Yes. Certificates of deposit (CDs) earn interest that is taxed the same way as savings account interest. The bank reports it on a 1099-INT, and you report it on your tax return. Some CDs require you to report interest even before the CD matures, depending on the term.

What if I earned interest in a joint account?

The bank reports the full interest on a 1099-INT. If the account is truly joint and both owners contributed equally, you and the other owner should split the interest for tax purposes. Each person reports their share on their own return. Keep records showing how you split it in case the IRS asks.