The IRS taxes savings account interest as ordinary income

Interest earned in a savings account is taxed by the federal government as ordinary income — the same way wages are taxed. The bank reports what you earned to the IRS on a Form 1099-INT, and you report that same amount on your tax return. The tax rate depends on your total income for the year and your tax bracket, not on the size of the account or how long the money sat there.

Most savings accounts earn very little interest — often less than 1% annually — so the tax bill is usually small. A $10,000 account earning 4.5% per year generates $450 in interest, which might add $100 to $150 to your federal tax bill depending on your bracket. But the mechanics are the same whether you earn $50 or $5,000 in interest: you owe tax on it.

Some states also tax savings account interest as income. A few states — including New Hampshire and Tennessee — do not tax interest income at all, which can make a difference if you live there or are planning to move. Your state tax return will ask about interest income separately from federal, and you report the same 1099-INT amount on both.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax bracket rate, reported on Form 1099-INT that the bank sends to you and the IRS.
  • Most states tax savings interest as income, but a handful including New Hampshire and Tennessee do not.
  • You report interest income on your tax return even if the bank does not send you a 1099-INT (which happens when interest is under $10).
  • Interest earned in a child's account is taxed to the child, not the parent, though special "kiddie tax" rules apply to children under 18 with high investment income.
  • High-yield savings accounts earn more interest than traditional accounts, so the tax bill is larger, but the tax treatment is identical.

When the bank sends you a 1099-INT form

Banks mail Form 1099-INT in January or early February for interest paid during the previous calendar year. You get one copy, the IRS gets another, and the form shows your account number, the bank's name, and the total interest earned. If you earned $10 or more in interest during the year, the bank must send you a 1099-INT by law.

If you earned less than $10, the bank may not send a form, but you still owe tax on the interest. You report it on your return anyway — the IRS does not know about it unless you tell them, but failing to report it is underreporting income. Keep your own records of interest earned if the bank does not send a form.

If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. When you file your tax return, you add up all the interest from all the forms and report the total. The IRS will cross-check the total against what each bank reported, so the numbers need to match.

How your tax bracket determines what you actually pay

The federal tax rate on interest income is not a flat percentage — it depends on your total income for the year and your filing status. If you are in the 22% tax bracket, $1,000 in interest income adds roughly $220 to your federal tax bill. If you are in the 12% bracket, the same $1,000 adds roughly $120. The higher your other income, the higher your bracket, and the more tax you owe on the interest.

This matters because a high-yield savings account earning 4.5% looks less attractive once you account for taxes. On $50,000 in savings, that is $2,250 in interest. If you are in the 24% bracket, you owe roughly $540 in federal tax on that interest, leaving you with $1,710 after tax — an effective return of about 3.4% instead of 4.5%.

State income tax works the same way. If your state has a 5% income tax rate, that $2,250 in interest adds another $112.50 to your state tax bill. Combined federal and state, you might owe $650 or more on that interest, depending on where you live.

Interest earned in accounts held by children

If you open a savings account in your child's name, the interest is taxed to the child, not to you. The bank reports the interest on a 1099-INT in the child's name and Social Security number. The child (or you, filing on their behalf) reports that interest on a tax return.

For 2024, a child with less than $1,450 in interest income owes no federal tax, even if they have no other income. This is called the standard deduction for dependents. Interest between $1,450 and roughly $2,900 is taxed at the child's rate, which is usually 10% or 12% — lower than an adult's rate. This is why some parents use children's savings accounts as a tax-planning tool.

However, if a child under 18 has more than $2,900 in investment income (interest, dividends, capital gains combined), the excess is taxed at the parents' rate under kiddie tax rules. This prevents parents from shifting large amounts of income to children to avoid taxes. The rules are complex and depend on the child's age and the parents' income, so consult a tax professional if your child has significant interest income.

How to report interest on your tax return

On the federal return, interest income goes on Schedule 1 (Form 1040), line 8b. You report the total from all 1099-INT forms combined. If you use tax software, it usually walks you through entering the 1099-INT information, and the software calculates where it goes on your return.

If you file by hand, add up all interest from all 1099-INT forms, write the total on line 8b, and that amount flows into your total income. The software or tax preparer then calculates your tax based on your bracket.

On your state return, look for a line asking about interest income — most states have one. Report the same total there. Some states allow deductions or exemptions for certain types of interest (like municipal bond interest), but savings account interest is almost always taxable at the state level.

Interest earned before you receive the 1099-INT

Interest accrues throughout the year, but you do not owe tax on it until the year ends. If you earn $100 in interest by June and withdraw the money, you still owe tax on that $100 in April of the following year when you file. The tax is due based on when the interest was earned, not when you withdraw it.

If you close a savings account mid-year, the bank still sends you a 1099-INT for all interest earned that year, even if you withdrew the money before year-end. You report that interest on your return for that tax year.

If you move money between accounts at the same bank or different banks, the interest follows the account where it was earned. Moving $10,000 from a regular savings account to a high-yield account does not change the tax treatment of interest already earned in the regular account.

Strategies to reduce taxes on savings interest

The most straightforward way to reduce taxes on savings interest is to keep less money in taxable savings accounts. Money in a traditional IRA or 401(k) earns interest tax-free until you withdraw it in retirement. Money in a Roth IRA earns interest tax-free permanently if you follow the withdrawal rules. These accounts have annual contribution limits, but they shelter interest from current-year taxes.

If you have a large emergency fund earning interest, consider keeping only three to six months of expenses in a high-yield savings account and investing the rest in a tax-advantaged retirement account or a taxable investment account where you can harvest losses to offset gains.

Some people use I Bonds (Series I Savings Bonds) issued by the U.S. Treasury as an alternative to savings accounts. Interest on I Bonds is not taxed by states, only by the federal government, and you can defer federal tax until you cash the bond. The trade-off is that your money is locked up for at least one year, and you pay a penalty if you cash it before five years.

What happens if you do not report interest income

The IRS receives a copy of every 1099-INT that your bank sends you. If you do not report the interest on your tax return, the IRS will eventually notice the discrepancy. The agency matches 1099-INT forms against filed returns and flags returns that are missing reported income.

If caught, you owe the tax you should have paid, plus interest on the unpaid amount (currently around 8% per year), plus penalties. The penalty for underreporting income is usually 20% of the underpaid tax. On $2,000 in unreported interest income, that could mean $400 in penalties plus interest, on top of the tax itself.

Reporting interest income is straightforward and the tax bill is usually small. It is not worth the risk of penalties and interest to skip it.

Frequently Asked Questions

Do I have to pay taxes on interest if I earned less than $10?

Yes. The bank only has to send you a 1099-INT if interest is $10 or more, but you still owe tax on any interest earned. Keep your own records and report it on your return. The IRS does not know about it unless you tell them, but failing to report it is underreporting income.

Is interest from a money market account taxed differently than a savings account?

No. Money market accounts, savings accounts, and certificates of deposit are all taxed the same way — as ordinary income at your tax bracket rate. The bank reports interest on a 1099-INT regardless of account type, and you report it the same way on your return.

Can I deduct savings account interest as a business expense?

No. Interest earned in a personal savings account is income, not an expense. If you have a business account and earn interest on business funds, that interest is still taxable income to the business, not deductible. Interest you pay on a business loan is deductible, but interest you earn is not.

What if I moved to a different state mid-year — which state taxes my interest?

You report interest income to the state where you lived when you earned it. If you moved from State A to State B in June, you report six months of interest to State A and six months to State B. Some states have reciprocal agreements, so check your old and new state's rules, or ask a tax professional if the situation is complex.

Does a high-yield savings account earn more interest, and do I pay more tax on it?

Yes to both. A high-yield account might earn 4% to 5% annually, while a traditional savings account earns 0.01% to 0.5%. The higher interest means a larger 1099-INT and a larger tax bill. The tax treatment is identical — it is all ordinary income — but the dollar amount of tax is higher because you earned more interest.