The IRS taxes savings account interest as ordinary income at your regular tax rate
Interest your bank pays you on a savings account is taxed by the federal government as ordinary income. That means it gets added to your wages, self-employment income, and any other money you earned that year, and you pay tax on the total at whatever rate applies to your income bracket. If you earned $50,000 in wages and $200 in savings interest, the IRS treats you as having earned $50,200 for tax purposes.
Your bank reports this interest to the IRS on a Form 1099-INT each January. You receive a copy, and the IRS receives a copy. You then report that same interest amount on your federal tax return. Most states also tax savings interest as ordinary income, though a handful of states do not tax interest income at all.
The tax you owe depends on your total income for the year and your filing status. Someone in the 22 percent federal tax bracket who earns $100 in savings interest will owe $22 in federal tax on that interest alone. Someone in the 12 percent bracket will owe $12. State tax, if your state has it, stacks on top of that.
Key Takeaways
- Savings account interest is taxed as ordinary income at your regular federal and state tax rates, not at a special lower rate.
- Your bank sends you a Form 1099-INT in January showing the interest you earned, and you must report that amount on your tax return.
- The amount of tax you owe on interest depends on your total income for the year and which tax bracket you fall into.
- Most states tax savings interest, but a small number do not — check your state's rules if you live in one of those states.
- You do not owe tax on interest until you file your return; the bank does not withhold it automatically unless you request it.
When your bank reports interest to the IRS
Banks are required to report interest to the IRS if you earned $10 or more in a calendar year. If you earned less than $10, your bank may still report it, but the IRS does not require it. Either way, you should report all interest you earned, even if it is under $10.
The bank sends Form 1099-INT to both you and the IRS by January 31 of the following year. 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 your 1099-INT forms and report the total on your return.
If you do not receive a 1099-INT by early February, contact your bank. If the bank cannot locate it, you can request a duplicate. You still owe tax on the interest whether or not you receive the form — the form is just proof of what you earned.
How your tax bracket determines what you pay
The federal government uses a progressive tax system, meaning your tax rate increases as your total income increases. In 2024, for example, a single filer in the 10 percent bracket pays 10 percent on income up to about $11,600, then 12 percent on income from $11,600 to about $47,150, and so on. Your savings interest gets added to your other income, and you pay tax at whatever rate applies to that portion of your total.
This matters because the same $100 in savings interest costs different people different amounts. A retiree with only $20,000 in total income might be in the 12 percent bracket and owe $12 on that interest. A person earning $150,000 in wages might be in the 24 percent bracket and owe $24 on the same $100 in interest. The interest itself is identical; the tax depends on your overall income.
You can find your tax bracket on the IRS website or by using a tax calculator. Your bracket changes each year based on inflation, and it depends on your filing status — single, married filing jointly, head of household, and so on.
State taxes on savings interest vary widely
Most states tax savings interest the same way the federal government does — as ordinary income. However, a handful of states do not tax interest income at all. These include Alaska, Florida, Illinois, Mississippi, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe federal tax on your savings interest but no state tax.
A few other states offer partial exemptions. For example, some states exempt interest earned on certain types of savings accounts or only tax interest above a certain threshold. Check your state's tax authority website or speak with a tax preparer if you are unsure whether your state taxes savings interest.
If you live in a state that taxes interest and you move to a state that does not, or vice versa, you may owe tax to your old state for the portion of the year you lived there. This is handled when you file your state return for that year.
What happens if you do not report savings interest
The IRS receives a copy of every 1099-INT your bank sends you. If you do not report the interest on your tax return, the IRS will notice the discrepancy when it matches your return against the 1099-INT. This can trigger an audit, a notice asking you to explain the difference, or a bill for back taxes plus penalties and interest.
The penalty for not reporting income is typically 20 percent of the unpaid tax, plus interest that compounds daily. If you owed $50 in tax on $250 in interest and did not report it, you could end up owing $50 in tax plus $10 in penalties plus interest — and the interest keeps growing until you pay.
If you made an honest mistake, you can file an amended return using Form 1040-X. The sooner you do this, the less interest will have accumulated. If the IRS contacts you first, do not ignore the notice — respond promptly and consider working with a tax professional.
Whether the bank withholds tax from your interest
Banks do not automatically withhold federal income tax from savings interest. You receive the full amount of interest, and you are responsible for paying tax on it when you file your return. This is different from wages, where your employer withholds tax automatically.
However, you can request that your bank withhold tax if you want to. This is rare, but it can help if you expect to owe a large amount and want to avoid a big bill at tax time. To request withholding, contact your bank and ask about Form W-9 or their withholding request process. Not all banks offer this option.
State tax is also not withheld automatically. You handle state tax when you file your state return, or you can make estimated tax payments if you have significant interest income and expect to owe more than $1,000 in state tax for the year.
High-yield savings accounts and money market accounts
High-yield savings accounts and money market accounts pay more interest than traditional savings accounts, sometimes significantly more. The interest is still taxed the same way — as ordinary income at your regular tax rate. A high-yield account paying 4 percent interest is taxed no differently than a regular account paying 0.01 percent.
This means the higher interest you earn, the more tax you owe. If you earn $500 in interest from a high-yield account instead of $50 from a regular account, you owe tax on $500 instead of $50. The bank still reports it on a 1099-INT, and you still report it on your tax return.
Some people use high-yield accounts specifically for this reason — the interest rate is high enough that the tax is worth paying. Others keep money in lower-yield accounts to minimize their tax bill. The choice depends on your overall financial situation and tax bracket.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
The bank does not have to report interest under $10 to the IRS, but you still owe tax on it. Report all interest you earned, regardless of the amount, on your tax return. The IRS expects you to report income even if the bank did not send a 1099-INT.
What if I have interest from multiple banks?
Add up all the interest from all your 1099-INT forms and report the total on your tax return. Each bank sends its own 1099-INT, so you may receive several forms. The IRS receives copies of all of them too, so make sure your reported total matches the sum of all the forms.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. Savings account fees are not deductible for most people. You pay tax on the interest and the fees come out of your account separately.
What if the bank made a mistake on my 1099-INT?
Contact your bank immediately and ask for a corrected form, called a Form 1099-INT with a corrected indicator. The bank will send the corrected form to you and the IRS. Report the corrected amount on your tax return. Keep both the original and corrected forms for your records.
Do I owe tax on interest I did not withdraw?
Yes. You owe tax on interest the moment it is credited to your account, whether you withdraw it or leave it there to earn more interest. The IRS taxes it based on when you earned it, not when you spend it.