Savings account interest counts as income on your tax return

Any interest your savings account earns is taxable income. The bank or credit union reports it to the IRS on a Form 1099-INT, and you report it on your tax return. You owe federal income tax on that interest at your regular tax rate — there is no special lower rate for savings interest, and the amount is added to your other income to determine your tax bracket.

The tax applies whether the interest is large or small. Even $5 in annual interest must be reported. Most banks send the 1099-INT by January 31 each year, showing all interest paid during the previous calendar year.

State income tax also applies in most states. If you live in a state with an income tax, you will owe state tax on the interest as well as federal tax. A handful of states — including Pennsylvania, Illinois, and Mississippi — exempt interest and dividend income from state tax, but this is rare.

Key Takeaways

  • Savings account interest is reported to the IRS on Form 1099-INT and must be included on your tax return as ordinary income.
  • You pay federal income tax on savings interest at your regular tax rate, with no special deduction or exclusion.
  • Most states also tax savings interest as part of your state income tax, though a few states exempt it entirely.
  • The bank reports interest to the IRS automatically, so underreporting or omitting it will likely be caught during processing.
  • Interest under $10 may not require a 1099-INT, but you still owe tax on it if you received it.

When the bank sends you the 1099-INT form

Your bank or credit union mails or makes available a Form 1099-INT by January 31 for all interest paid during the previous year. If you have multiple savings accounts, you may receive more than one form — one from each institution. Some banks combine interest from checking and savings accounts on a single form.

You should receive the form even if the interest is very small. However, banks are not required to issue a 1099-INT if interest is under $10 for the year. If you earned less than $10 in interest and did not receive a form, you still owe tax on that interest and must report it on your return.

If you do not receive a 1099-INT by early February, contact the bank directly. You will need the form to file your return accurately, and the IRS has already received a copy.

How to report savings interest on your tax return

On a federal return, you report savings interest on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest and dividends combined. If you have $1,500 or less, you can report the interest directly on Form 1040, line 2b, without filing Schedule B.

Write the name of the bank, the amount from the 1099-INT, and add it to any other interest income you received that year. The total goes on your Form 1040 as part of your income, which increases your taxable income and may push you into a higher tax bracket.

For state taxes, follow your state's rules. Most states have a line on their income tax form where you report interest income. Some states use the same amount as your federal return; others require a separate calculation. Check your state tax authority's website or your state return instructions for the exact line.

The tax impact of high-yield savings accounts

High-yield savings accounts pay more interest than traditional savings accounts — sometimes 4% to 5% annually compared to 0.01% or less at major banks. The higher interest means a larger tax bill. A $10,000 balance in a high-yield account earning 4.5% generates $450 in taxable interest per year, which could cost $100 to $150 in federal and state taxes depending on your tax bracket.

This does not mean high-yield accounts are a bad choice — the after-tax return is still higher than a traditional savings account. But it is important to factor the tax cost into your decision. If you are in a high tax bracket (28% federal plus state tax), you keep roughly 60 cents of every dollar earned in interest. In a lower bracket, you keep more.

Money market accounts and certificates of deposit (CDs) follow the same tax rules as savings accounts. All interest is taxable at your regular rate.

What happens if you do not report the interest

The IRS receives a copy of every 1099-INT the bank sends you. If you do not report the interest on your return, the IRS will likely notice the discrepancy when it matches your return against the forms it received from banks. This can trigger a notice, a correction, and a bill for back taxes plus interest and penalties.

Even small amounts matter. Failing to report $50 in interest can result in a letter from the IRS asking you to explain the omission. It is simpler and cheaper to report it correctly the first time.

If you made an honest mistake and forgot to report interest in a prior year, you can file an amended return (Form 1040-X) for that year. This is better than waiting for the IRS to contact you.

Tax-advantaged alternatives to regular savings accounts

If you want to save money without paying tax on the interest, a Roth IRA or Roth 401(k) allows interest and investment growth to accumulate tax-free. You pay taxes on the money going in (with some income limits on Roth IRAs), but the interest and growth are never taxed. The catch is that you cannot withdraw the money before age 59½ without penalties, except in specific situations.

A traditional IRA or 401(k) defers the tax — you do not pay tax on the interest while it sits in the account, but you pay tax on withdrawals in retirement. This can be useful if you expect to be in a lower tax bracket when you retire.

For money you need to access sooner, there is no way to avoid the tax on savings interest. The interest is income, and income is taxed.

Frequently Asked Questions

Do I have to report savings interest if it is under $10?

Yes. Banks do not have to send a 1099-INT for interest under $10, but you still owe tax on it. If you earned $8 in interest and did not receive a form, you must still report that $8 on your return. The IRS does not have a minimum threshold for taxable income.

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

No. You report the full interest amount on your return. Savings account fees are not deductible on most tax returns. However, if you have a lot of investment-related expenses, you may be able to deduct them under specific circumstances — consult a tax professional about your situation.

What if I moved money between banks during the year?

Each bank reports only the interest it paid you. If you had $5,000 at Bank A for six months earning $100 and $5,000 at Bank B for six months earning $100, you will receive two 1099-INT forms totaling $200. Report both amounts on your return.

Is interest from a joint savings account taxed differently?

The bank reports the full interest amount on a 1099-INT. If the account is jointly owned, you and the other owner must decide how to split the income for tax purposes — usually 50/50, but it depends on your ownership agreement. Each person reports their share on their own return.

Do I owe tax on interest if I am a dependent?

Yes, but there are income thresholds. For 2024, a dependent with unearned income (like interest) over $1,300 must file a return and report the interest. If the interest is under $1,300, you may not need to file, but you can still choose to file if you want a refund of withheld taxes.