The government taxes the interest your savings account earns, not the account balance itself
The money you deposit into a savings account is yours and is not taxed. The federal government does tax the interest that account earns each year. Your bank will report this interest to the IRS on a Form 1099-INT if you earned $10 or more in a calendar year, and you must report it on your federal tax return. Some states also tax savings account interest, though the rules vary by state.
The interest rate on most savings accounts is low — often less than 1 percent annually — so the tax bill is usually small. But if you have a large balance or a high-yield savings account paying 4 or 5 percent, the interest can add up quickly and create a real tax obligation.
Key Takeaways
- Your savings account balance itself is never taxed by the federal government, only the interest it earns each year.
- Banks report interest of $10 or more on Form 1099-INT, and you must include this on your tax return.
- Interest income is taxed as ordinary income at your regular tax rate, which depends on your total income for the year.
- 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 keeping money in accounts that do not earn interest, such as checking accounts or money market funds held in certain retirement accounts.
How the IRS treats savings account interest
The IRS classifies savings account interest as ordinary income. This means it is taxed at the same rate as your wages, salary, or other income. If you earn $50,000 a year and your savings account earns $500 in interest, the IRS treats you as if you earned $50,500 for tax purposes.
Your tax bracket determines how much of that interest you owe. If you are in the 22 percent tax bracket, $500 in interest costs you roughly $110 in federal tax. If you are in the 12 percent bracket, it costs about $60. The exact amount depends on your total income for the year and your filing status.
You do not pay tax on the interest when you earn it. Instead, you report it when you file your annual tax return, usually by April 15 of the following year. If you owe a large amount of tax on savings interest and did not have enough withheld from your paycheck, you may owe additional tax at filing time.
When your bank reports interest to the IRS
Banks are required to send you a Form 1099-INT and file a copy with the IRS if you earned $10 or more in interest during the calendar year. You should receive this form by January 31 of the following year. The form shows the account number, the bank's name, and the total interest paid.
If you earned less than $10, your bank does not have to send you a 1099-INT, but you still owe tax on that interest if you file a return. Keep your own records of interest earned if the amount is small.
Some banks also report interest on other forms. For example, if you earned interest in a certificate of deposit (CD) that was issued in one year but matures in another, the bank may report it on Form 1099-OID instead. Read the form your bank sends carefully to make sure you report the right amount.
State taxes on savings account interest
Nine states do not have an income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividend income). If you live in one of these states, you owe no state tax on your savings interest.
Every other state taxes savings interest as ordinary income, using rules similar to the federal system. Some states have lower tax rates than the federal government, and some have higher ones. A few states offer small deductions or exemptions for interest income, but these are rare and usually apply only to retirees or people over a certain age.
If you live in a state with an income tax and earn interest in a savings account, you must report it on your state return as well as your federal return. Your state tax form will ask for interest income, and you can usually use the same 1099-INT your bank sent you.
How high-yield savings accounts affect your tax bill
High-yield savings accounts currently pay 4 to 5 percent interest annually, compared to 0.01 to 0.5 percent at traditional banks. This means the interest adds up much faster. A $50,000 balance in a high-yield account earning 4.5 percent generates $2,250 in interest per year, which could cost you $500 or more in federal tax depending on your bracket.
The interest is still reported on Form 1099-INT the same way, and you still owe tax on it. The higher rate does not change the tax treatment — it just means a larger tax bill. If you are saving for a short-term goal and do not want to owe tax on the interest, a high-yield account may not be the best choice, though the after-tax return is usually still better than a traditional savings account.
Tax-advantaged alternatives to regular savings accounts
If you want to save money without owing tax on the interest, you have a few options. A Roth IRA or Roth 401(k) allows you to earn interest and withdraw it tax-free in retirement, though you cannot touch the money before age 59½ without penalties in most cases. A traditional IRA or 401(k) defers the tax until you withdraw the money.
A 529 college savings plan lets you save for education expenses without paying tax on the interest, as long as you use the money for tuition, fees, or room and board. A Health Savings Account (HSA) works the same way for medical expenses.
Money in these accounts is not in a regular savings account — it is usually invested in mutual funds or other investments — but the tax treatment is much better if you have a long time horizon and a specific goal. Talk to a tax professional or financial advisor about whether these options make sense for your situation.
What to do if you did not receive a 1099-INT
If you earned $10 or more in interest and your bank did not send you a 1099-INT by February 15, contact the bank and ask for a copy. Keep a record of the request and the date you made it.
If the bank cannot locate the form, ask them to provide a written statement showing the interest earned. You can use this to report the income on your tax return even if you do not have the official 1099-INT. The IRS has a copy on file from the bank anyway, so reporting the interest protects you from an audit notice later.
If you earned interest but the amount was under $10 and you did not receive a form, you still owe tax on it. Keep your own records — bank statements, monthly interest notifications, or year-end summaries from your online account — and report the total on your return.
Frequently Asked Questions
Do I owe tax on savings account interest if I do not file a tax return?
If you earned $10 or more in interest and are required to file a return based on your income, yes. The IRS receives a copy of your 1099-INT from the bank, and not reporting it can trigger an audit notice. If you are not required to file a return, you do not owe tax on the interest, but you may want to file anyway to claim a refund if taxes were withheld from your paycheck.
Can I deduct savings account interest as a business expense?
No. Interest earned on a personal savings account is not deductible. If you have a business savings account and the interest is tied to a business loan, you may be able to deduct the interest paid on the loan, but not the interest earned on the account itself.
What if I earned interest in multiple savings accounts?
Each bank reports interest separately on its own 1099-INT. You must add up all the interest from all your accounts and report the total on your tax return. The IRS will receive copies of all the forms, so make sure your return matches the total they have on file.
Does moving money between savings accounts create a tax event?
No. Moving money from one account to another is not taxable. Only the interest earned is taxed. You can transfer money as many times as you want without owing tax, as long as you do not exceed any withdrawal limits your bank has set.
What if my savings account earns less than $1 in interest?
You still owe tax on it, though the amount is negligible. Your bank does not have to send a 1099-INT if the interest is under $10, but you should still report it on your return if you file one. Keep your bank statements as proof of the amount earned.