Interest income is taxed as ordinary income at your federal tax rate

The money your bank pays you for keeping money in a savings account is called interest income, and the IRS taxes it the same way it taxes your wages or salary. If you earn $50 in interest over a year, that $50 counts as taxable income. You pay tax on it at whatever your ordinary income tax rate is — not at a special lower rate.

The bank does not withhold tax from your interest automatically. Instead, the bank reports what you earned to both you and the IRS on a form called a 1099-INT, which arrives by January 31 each year. You then report that interest on your tax return when you file.

The amount of interest you earn depends entirely on the interest rate your bank offers and how much money sits in the account. Banks are not required to pay interest at all, and rates vary widely — some accounts pay nearly nothing, while high-yield savings accounts currently pay 4% to 5% annually. A $10,000 balance at 4.5% earns about $450 per year in taxable interest.

Key Takeaways

  • Interest earned in a savings account is reported to the IRS on Form 1099-INT and taxed as ordinary income at your regular tax rate.
  • Banks report interest income only if you earned $10 or more during the year, though you may owe tax on smaller amounts.
  • You report the interest on your tax return; the bank does not withhold the tax automatically.
  • The principal balance in your account — the money you deposited yourself — is never taxed, only the interest the bank pays you.
  • If you have multiple savings accounts, the bank reports each one separately, but you combine all interest on your tax return.

When the bank sends you a 1099-INT form

Your bank mails or emails a 1099-INT to you by January 31 of the year after you earned the interest. For example, interest you earned during 2024 appears on a 1099-INT you receive in January 2025. The form shows your name, address, Social Security number, the bank's name, and the total interest paid to you that year.

Banks are required to send a 1099-INT only if you earned $10 or more in interest during the year. If you earned $8, the bank may not send a form — but you still owe tax on that $8 if you file a return. If you earned less than $10 across all your accounts at that bank, ask the bank for a statement showing the exact amount, because you will need it for your return.

The bank also sends a copy of the 1099-INT directly to the IRS. This means the IRS already knows how much interest you earned before you file your return. If you do not report the interest on your return, the IRS will notice the mismatch.

How to report interest income on your tax return

When you file your federal tax return, you report interest income on Schedule B (if you use the long form) or directly on the 1040 form (if you use the short form). You list each bank and the interest amount from each 1099-INT you received. If you have multiple savings accounts at different banks, you add up all the interest and report the total.

The interest then flows into your total income, which determines your tax bracket and how much tax you owe. If your only income is $500 in interest and you are single with no dependents, you likely owe no federal tax because the standard deduction (currently $14,600 for single filers in 2024) covers it. But if you have wages or other income, the interest stacks on top and may push you into a higher tax bracket.

State income tax works the same way. Most states tax interest income at your regular state tax rate. A few states — including New Hampshire and Tennessee — do not tax interest income at all, which is one reason some people keep savings accounts in those states.

The difference between interest and your original deposit

The money you put into the savings account yourself — your principal — is never taxed. You already paid tax on your wages when you earned them, and moving that money into a savings account does not create a new tax event. Only the interest the bank pays you is taxable.

This matters if you withdraw money from the account. If you deposited $5,000 and the account earned $200 in interest, your balance is $5,200. You can withdraw all $5,200 with no tax consequence — the $5,000 is your own money, and the $200 was already reported as income when you filed your return.

Some people confuse this with capital gains tax, which applies to investments like stocks. Savings account interest is simpler: it is ordinary income, not a capital gain, and there is no special tax rate for it.

What happens if you close the account mid-year

If you close a savings account partway through the year, you still owe tax on all the interest earned up to the closing date. The bank calculates the interest through the day you close the account and includes it on your 1099-INT for that year.

For example, if you close an account on June 30 and earned $75 in interest by that date, the bank reports the full $75 on your 1099-INT for that year. You report it on your tax return the following spring, even though the account no longer exists.

If you move money from one bank to another, that transfer is not a taxable event. You are simply moving your own money. Only the interest earned at each bank is taxable.

Multiple accounts and joint accounts

If you have savings accounts at more than one bank, each bank sends you a separate 1099-INT. You combine all the interest amounts and report the total on your tax return. The IRS does not care how many accounts you have — it cares about your total interest income.

If you have a joint savings account with another person — a spouse, parent, or anyone else — the bank reports the interest to both account holders. The bank may split the interest 50-50, or it may report the full amount to both people. Check your 1099-INT carefully. If you and your spouse file jointly, you combine the interest on one return. If you file separately, you each report your share.

If you are unsure how the bank split the interest, contact the bank and ask for a breakdown. You need the exact amount for your tax return, and the bank's records are the source of truth.

Tax-advantaged alternatives to regular savings accounts

If you want to save money and reduce the tax you owe on interest, you can use a Roth IRA or Roth 401(k). Interest earned inside these accounts is not taxed at all, ever — you pay no tax on the interest when you earn it, and no tax when you withdraw the money in retirement. The tradeoff is that you can only contribute a limited amount per year, and you cannot withdraw the money before age 59½ without penalties.

A traditional IRA or 401(k) also lets interest grow without annual tax, but you pay tax on the money when you withdraw it in retirement. These accounts make sense if you expect to be in a lower tax bracket after you retire.

For money you need to access soon, a regular high-yield savings account is usually the best choice, even though you pay tax on the interest. The interest rate is high enough that the after-tax return often beats other short-term options.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

The bank does not have to send you a 1099-INT if you earned less than $10, but you still owe tax on the interest if you file a return. Get a statement from the bank showing the exact amount and report it on your return. The IRS may not catch a small amount, but reporting it is the correct thing to do.

What if I did not receive a 1099-INT from my bank?

Contact the bank and ask for a copy. If you earned $10 or more, the bank is required to send one by January 31. If the bank cannot find a record, ask for a statement showing your interest earned. You need this information to file your return accurately.

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 for most people. If the bank charged you a fee, you pay tax on the interest and lose money to the fee — there is no offset.

Is interest from a money market account taxed the same way?

Yes. Money market accounts are savings accounts, and interest from them is reported on a 1099-INT and taxed as ordinary income, just like interest from a regular savings account.

What if my savings account is in a child's name?

The child is responsible for reporting the interest on their own tax return, even if they are a minor. If the interest is small, the child may not owe tax because of the standard deduction. The parent cannot claim the interest as their own income.