Yes, the interest your savings account earns is taxed as ordinary income

Money you deposit into a savings account is yours and not taxed. But the interest the bank pays you on that money is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on it, and depending on where you live, you may owe state income tax too.

Your bank will send you a form called a 1099-INT each January if you earned $10 or more in interest during the previous 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 tax rate you pay depends on your overall income and tax bracket for that year. A person in the 22% tax bracket pays 22% on the interest; someone in the 12% bracket pays 12%. This is why the same $100 in interest costs different people different amounts in taxes.

Key Takeaways

  • Interest earned in a savings account is taxed as ordinary income at your regular tax rate, not at a special rate.
  • Your bank sends you a 1099-INT form if you earned $10 or more in interest, which you report on your tax return.
  • You owe tax on interest even if the amount is small or if you don't receive a 1099-INT form.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means more tax owed on that interest.
  • Certain accounts like Roth IRAs and 529 plans have tax-free or tax-deferred interest, but regular savings accounts do not.

When you receive the 1099-INT and what to do with it

Banks mail 1099-INT forms by January 31 each year. The form shows how much interest you earned in the previous calendar year. If you have accounts at multiple banks, you may receive several 1099-INT forms — one from each institution.

You report the interest shown on your 1099-INT on Schedule 1 of your Form 1040 (the main federal tax form). If you file electronically, the software walks you through entering this information. If you file by hand, you write the amount in the "Interest" line and add it to your other income.

Keep your 1099-INT forms for your records, but you do not mail them with your return. The IRS receives a copy directly from your bank, so they already know how much interest you earned. Reporting it correctly on your return prevents mismatches that could trigger an audit notice.

How much interest you actually earn and what affects the tax

The amount of interest depends on the account type and the bank's rate. A traditional savings account at a large bank might pay 0.01% annually. A high-yield savings account at an online bank might pay 4% to 5%. On a $10,000 balance, that difference is $1 per year versus $400 to $500 per year — and the tax owed on that interest is very different.

Your tax bracket determines how much of the interest you keep. If you earn $500 in interest and you are in the 22% tax bracket, you owe $110 in federal tax on that interest. If you are in the 12% bracket, you owe $60. State income tax (where it applies) is added on top of the federal amount.

Some people with very low income may owe no federal income tax at all, even on interest. If your total income falls below the standard deduction for your filing status, you file a return but owe zero tax. The interest is still reported, but no tax is due.

Accounts where interest is not taxed each year

Certain retirement and education accounts let interest grow without annual tax. A Roth IRA earns interest that is never taxed, as long as you follow the withdrawal rules. A traditional IRA earns interest that is tax-deferred — you pay tax later when you withdraw the money, not each year. A 529 education savings plan grows tax-free if the money is used for may have access to education expenses.

These accounts have contribution limits and rules about when you can withdraw money without penalty. A Roth IRA, for example, limits how much you can contribute each year based on your income, and you cannot withdraw earnings before age 59½ without paying a penalty (with some exceptions). But the tax benefit on the interest is substantial if you can use these accounts.

A regular savings account has no such limits — you can deposit and withdraw as much as you want, whenever you want. The trade-off is that you pay tax on the interest every year. For most people, a high-yield savings account offers a reasonable balance: higher interest than a traditional account, but still the flexibility of a regular savings account.

Reporting interest if you have multiple accounts or joint accounts

If you have savings accounts at three different banks, each bank sends you a separate 1099-INT. You add up all the interest from all the forms and report the total on your tax return. The IRS receives copies of all three forms, so they will see the total too.

If you have a joint savings account with a spouse or another person, the bank reports the interest to the Social Security number listed as the account owner on the 1099-INT. If both names are on the account, the bank picks one. You and the other account holder need to decide how to split the interest for tax purposes — usually 50/50 if you own it equally — and each report your share on your own return.

If you are unsure how the bank reported the interest, call the bank and ask. They can tell you which name received the 1099-INT and help you understand how to report it correctly on your return.

What happens if you earn very little interest

If you earn less than $10 in interest during the year, your bank does not send you a 1099-INT. But you still owe tax on that interest if your total income is above the standard deduction. You report it on your return even without the form.

If your total income (including the small amount of interest) is below the standard deduction for your filing status, you do not owe federal tax. But you may still want to file a return if taxes were withheld from your paychecks, because you could get a refund.

The standard deduction changes each year. For 2024, it is $14,600 for a single person and $29,200 for a married couple filing jointly. Check the IRS website for the current year's amount if you are not sure whether you need to file.

Frequently Asked Questions

Do I owe tax on interest if I don't receive a 1099-INT?

Yes. The $10 threshold means your bank does not send a form if you earned less than that, but you still owe tax on any interest you earned. You report it on your return based on your bank statements or the interest shown in your online account.

Can I deduct savings account interest as a loss on my taxes?

No. Interest income cannot be deducted. You report it as income, and that increases your tax liability. There is no offsetting deduction for savings account interest.

Is interest from a high-yield savings account taxed differently than interest from a regular savings account?

No. Both are taxed as ordinary income at your regular tax rate. The only difference is the amount of interest — a high-yield account earns more, so you owe tax on a larger amount.

What if I close my savings account during the year?

You still owe tax on all interest earned in that account up to the date you closed it. The bank reports the interest on a 1099-INT for that year, and you report it on your return.

Do I need to pay estimated taxes on savings account interest?

Only if your total tax liability for the year is high enough. Most people with only savings account interest do not need to pay estimated taxes, because the amount is small. If you have other income sources and expect to owe a large amount, you may need to make quarterly estimated payments.