Interest income from a savings account is taxed as ordinary income at your federal tax rate, and possibly at your state rate too

The interest your bank pays you on a savings account counts as taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on the full amount. If you live in a state with an income tax, you typically owe state tax on that interest as well. The bank does not withhold the tax automatically; you report it yourself when you file your tax return.

The tax you pay depends on your total income for the year and your tax bracket. Someone in the 22% federal bracket pays more tax on the same interest amount than someone in the 10% bracket. State tax rates vary by location — some states do not tax interest income at all, while others tax it at rates up to 13%.

Key Takeaways

  • Banks report interest paid to you on Form 1099-INT, which you receive by January 31 and must report on your tax return.
  • Interest income is taxed at your ordinary income tax rate, not at a special lower rate, and the amount owed depends on your total yearly income.
  • If you earned $10 or more in interest during the year, the bank must send you a 1099-INT; if you earned less, you still report it but the bank does not issue the form.
  • High-yield savings accounts pay more interest than traditional savings accounts, which means higher taxable income and potentially higher taxes owed.
  • State tax treatment varies — some states do not tax interest income, while others tax it at the same rate as federal income.

When the bank reports your interest to the IRS

Your bank sends you a Form 1099-INT by January 31 each year if you earned $10 or more in interest during that calendar year. This form lists the total interest paid to your account. The bank also sends a copy to the IRS, so the IRS knows how much interest you received.

If you earned less than $10 in interest, the bank does not have to send you a 1099-INT, but you still owe tax on that interest. You report it on your tax return based on your own records — your bank statements show the interest deposits.

The 1099-INT arrives in the mail or electronically through your bank's website, depending on how you receive statements. Check your account portal or your mailbox starting in late January. If you do not receive it by early February, contact your bank and request a copy.

How to report interest income on your tax return

You report interest income on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in total interest and dividend income for the year. If you have $1,500 or less, you can report it directly on Form 1040 without filing Schedule B.

List each account's interest separately on Schedule B, or combine all interest from the same bank if you have multiple accounts there. The total from Schedule B transfers to your Form 1040, where it becomes part of your total income for the year. Your tax liability is then calculated based on that total income and your tax bracket.

If you file electronically, tax software walks you through entering the 1099-INT information. If you file by paper, copy the amounts from your 1099-INT forms onto the appropriate lines of Schedule B and Form 1040.

The difference between federal and state tax on interest

Federal tax applies to all U.S. residents and is calculated using the federal tax brackets for your filing status. State tax depends on where you live. Nine states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire — do not tax interest income at all. The remaining 41 states and Washington, D.C. tax interest as ordinary income.

State tax rates range from about 1% to 13%, depending on the state and your income level. Some states use a flat rate (the same percentage for everyone), while others use brackets similar to the federal system. If you moved during the year or lived in more than one state, you may need to file returns in multiple states and report your interest income to each.

If you live in a state with no income tax, you owe only federal tax on your interest. If you live in a state with income tax, you report the same interest amount to both the IRS and your state tax authority.

How high-yield savings accounts affect your tax bill

A high-yield savings account pays significantly more interest than a traditional savings account — often 4% to 5% annually, compared to 0.01% or less at many large banks. This higher interest means more taxable income and a larger tax bill, even though the account itself is still tax-free (meaning the account type is not taxed differently; the interest is).

For example, $10,000 in a traditional savings account earning 0.01% annually generates $1 in interest and $0.22 in federal tax (at the 22% bracket). The same $10,000 in a high-yield account earning 4.5% generates $450 in interest and $99 in federal tax. The higher rate is still worth it for most people — you keep more money even after taxes — but the tax impact is real and should factor into your planning.

If you are in a high tax bracket, the after-tax return on a high-yield account is lower than the advertised rate. Use an after-tax calculator or work backward from your tax bracket to understand what you actually keep.

Interest earned in a child's savings account or custodial account

Interest earned in a savings account held in a child's name is taxed to the child, not the parent. However, a child with little or no other income may owe no federal tax on that interest, depending on the amount and the year. The IRS sets a standard deduction for dependents each year; interest below that threshold is not taxed.

For 2024, a dependent child can earn up to $1,300 in interest income before owing federal tax (this amount changes yearly). Interest above that is taxed at the child's rate, which is typically lower than a parent's rate. A parent still receives a 1099-INT in the child's name and must report it, even if no tax is owed.

Custodial accounts (accounts set up by a parent for a minor) follow the same rules. The interest is taxed to the child. Some custodial accounts are designed to minimize taxes through strategies like the Uniform Transfers to Minors Act (UTMA), but the interest itself is still reported and taxed annually.

What to do if you did not receive a 1099-INT or if the amount is wrong

If your bank paid you interest but did not send a 1099-INT by early February, contact the bank directly. Provide your account number and ask for a duplicate or corrected form. Banks sometimes delay sending forms if your address on file is outdated or if there was a processing error.

If the 1099-INT shows an amount that does not match your bank statements, compare the form to your statements line by line. Interest may have been paid on different dates than you expected, or the bank may have made an error. Contact the bank with the discrepancy and ask for a corrected 1099-INT (called an amended 1099-INT) if needed. The bank will send the corrected version to you and the IRS.

If you file your tax return before receiving a corrected 1099-INT, you can file an amended return (Form 1040-X) once you have the correct amount. Keep copies of all 1099-INT forms you receive, whether original or corrected, for your records.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether the bank sends you a 1099-INT form. You still owe tax on all interest income, regardless of amount. Report it on your tax return using your bank statements as proof of the amount earned.

Can I avoid taxes on savings account interest by opening accounts in different banks?

No. The IRS taxes all your interest income combined, regardless of how many banks or accounts you use. Each bank reports interest separately on its 1099-INT, but you combine all interest when you file your return. The total is what determines your tax liability.

What if I moved to a state with no income tax after earning interest in a state that does?

You owe tax to the state where you lived when you earned the interest. If you lived in a state with income tax for part of the year and moved to a no-tax state later, you file a part-year resident return in the first state and report only the interest earned while you lived there. The second state does not tax that interest.

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

No. Money market accounts, savings accounts, and certificates of deposit (CDs) are all taxed the same way — the interest is ordinary income taxed at your regular rate. The account type does not change the tax treatment; only the interest amount matters.

Do I need to make estimated tax payments if I earn a lot of interest?

Possibly. If your interest income is large enough that you expect to owe $1,000 or more in taxes for the year and you do not have enough tax withheld from other income, the IRS may require you to make quarterly estimated tax payments. Consult a tax professional if your interest income is substantial.