Interest on savings accounts is taxed as ordinary income at your federal tax rate

The tax you owe on a savings account depends on how much interest the account earned during the year, not on the balance itself. Banks report this interest to the IRS on a 1099-INT form, and you report it on your tax return. The interest is taxed at your regular income tax rate — the same rate that applies to your salary or wages — which ranges from 10% to 37% depending on your total income and filing status.

Most savings accounts earn very little interest, so the tax bill is usually small. A savings account with $10,000 earning 4% annually generates $400 in interest; if you're in the 22% tax bracket, you'd owe about $88 in federal tax on that interest. State and local taxes may apply on top of that, depending on where you live.

You do not pay tax on the money you deposit into the account — only on the interest it earns. The principal (the money you put in) is never taxed, because it's your own money moving between accounts.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax bracket rate, which ranges from 10% to 37%.
  • Banks send you a 1099-INT form showing the interest earned, and you report that amount on your tax return.
  • You pay tax only on the interest earned, not on your savings balance or the money you deposit.
  • Many states and some cities also tax savings interest, so your total tax rate may be higher than the federal rate alone.
  • If interest earned is less than $10, the bank may not send a 1099-INT, but you still owe tax on it if you have other reportable income.

How the IRS knows about your savings interest

Banks are required to report interest paid to you during the calendar year on a 1099-INT form. The bank sends this form to you and to the IRS by January 31 of the following year. If you have multiple savings accounts at different banks, you'll receive a separate 1099-INT from each one.

The IRS matches the 1099-INT they receive from the bank against your tax return. If you don't report the interest income, the IRS will notice the mismatch and may send you a notice asking for the unpaid tax plus penalties and interest.

Some banks may not issue a 1099-INT if the interest earned is less than $10 in a calendar year. However, you are still required to report that interest on your tax return if you have other reportable income. The threshold of $10 is just the bank's reporting requirement, not a threshold for owing tax.

Federal tax brackets and what your rate actually is

Your tax rate on savings interest depends on your total income for the year, not just the interest. The IRS uses tax brackets — income ranges that correspond to different rates. For 2024, the federal brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your bracket is determined by your filing status (single, married filing jointly, head of household, etc.) and your total taxable income.

If you're single and earn $50,000 in wages, you're in the 22% bracket. Any savings interest you earn that year is taxed at 22%. If you're married filing jointly with $100,000 in combined income, you might be in the 12% bracket, so your savings interest is taxed at 12%.

The brackets change each year, and they're adjusted for inflation. You can find the current year's brackets on the IRS website or on your tax software when you file.

State and local taxes on savings interest

Most states tax savings account interest as part of your state income tax. The state rate varies widely — from 0% in states like Texas, Florida, and Wyoming (which have no state income tax) to over 13% in states like California and New York. Some cities also impose a local income tax on top of state tax.

If you live in a state with income tax, you'll report your savings interest on your state tax return as well as your federal return. The state 1099-INT information is usually the same as what you report federally, so you don't need a separate form.

A few states offer tax breaks for savings interest. Some exempt interest earned on certain types of savings accounts or set a threshold below which interest is not taxed. Check your state's tax department website to see if any exemptions apply to you.

When you don't owe federal tax on savings interest

You don't owe federal tax on savings interest if your total income is below the standard deduction for your filing status. The standard deduction is the amount of income you can earn without owing federal tax. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly.

If you're a dependent claimed on someone else's return, the rules are different. Your standard deduction is limited to the greater of $1,300 or your earned income plus $450 (up to the full standard deduction amount). Even if you have no earned income, you may still owe tax on savings interest if it exceeds this threshold.

State tax rules vary. Some states follow the federal standard deduction, while others have their own thresholds. Even if you don't owe federal tax, you may still owe state tax on savings interest.

How to report savings interest on your tax return

When you file your federal tax return, you report savings interest on Schedule 1 (Form 1040), line 8, labeled "Interest." You add up all the 1099-INT forms you received from all your banks and enter the total. This amount is then added to your other income to calculate your total taxable income.

If you use tax software, the software will ask you to enter the interest amount, and it will automatically place it in the correct location on your return. If you file by paper, you'll write the amount on the line and attach a copy of your 1099-INT forms.

You do not need to itemize deductions or take any special steps to report savings interest — it's straightforward income that goes on the main part of your return. If your total interest from all sources is $1,500 or more, you may also need to file Schedule B (Form 1040), which asks for details about each account.

High-yield savings accounts and tax implications

High-yield savings accounts earn more interest than traditional savings accounts — sometimes 4% to 5% annually compared to 0.01% at a regular bank. This means you'll owe more tax on the interest, but the after-tax earnings are usually still higher than a traditional account.

The tax treatment is identical to a regular savings account: the interest is reported on a 1099-INT and taxed as ordinary income. The higher interest rate doesn't change the tax rate you pay — it just means more interest to report.

Some people move money to high-yield accounts specifically to earn more interest, knowing they'll owe tax on it. The math usually works out: earning 4% interest and paying 22% tax on it leaves you with 3.12% after tax, which is still much better than earning 0.01% at a traditional bank.

What to do if you didn't receive a 1099-INT

If you earned interest but didn't receive a 1099-INT by February 15, contact the bank directly. The bank may have the wrong address on file, or the interest may have been below the $10 reporting threshold. Ask the bank for a corrected form or a statement showing the interest earned.

If the bank confirms you earned interest but won't provide documentation, you can still report it on your tax return based on your own records — a bank statement or account history showing the interest deposits. The IRS may follow up if the amount doesn't match what they received from the bank, but you can explain the discrepancy.

If you received a 1099-INT but believe the amount is wrong, contact the bank to request a corrected form (called a 1099-INT corrected). The bank will issue a new form with the correct amount, and you'll report the corrected amount on your return.

Frequently Asked Questions

Do I have to pay tax on savings interest if I'm retired?

Yes. Savings interest is taxed the same way for everyone, regardless of age or retirement status. However, if your total income (including savings interest) is below the standard deduction for your age, you may not owe federal tax. People over 65 have a higher standard deduction, which can help offset small amounts of interest income.

What if I move money between my own savings accounts?

Transfers between your own accounts are not taxed. Only the interest earned on the money is taxed. Moving $5,000 from one savings account to another generates no tax, but the interest that account earns is taxable.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount on your tax return. Fees charged by the bank are not deductible against the interest. However, if a bank charges you a fee that exceeds the interest earned, your net interest could be negative — in that case, you'd report zero interest income, not a loss.

Is interest from a money market account taxed differently?

No. Money market accounts are taxed the same way as savings accounts — the interest is reported on a 1099-INT and taxed as ordinary income at your regular tax rate. The account type doesn't change the tax treatment.

What if I earned interest in a joint account with someone else?

The bank will report the full interest on a 1099-INT to whoever's Social Security number is listed first on the account. That person reports the full amount on their tax return. If you and the co-owner want to split the tax burden, you'll need to file an amended return or work it out between yourselves — the IRS sees the interest as belonging to whoever received the 1099-INT.