Interest income from a savings account is taxed as ordinary income at your federal tax rate, plus state income tax if your state has one
The bank or credit union holding your savings account will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. That form reports the interest amount to both you and the IRS. You then report that interest on your federal tax return as income, and it gets taxed at whatever your ordinary income tax bracket is — not at a special lower rate.
How much you actually owe depends on your total income for the year and your tax filing status. Someone in the 12% federal tax bracket pays 12% on that interest. Someone in the 22% bracket pays 22%. If your state has an income tax, you typically owe state tax on the interest too, at your state's rate. A few states — including Florida, Texas, and Wyoming — have no state income tax, so residents there owe only federal tax on savings interest.
The interest itself is usually small. A savings account earning 4% to 5% annually on a $10,000 balance generates $400 to $500 in interest per year. At a 22% federal rate plus, say, 5% state tax, you'd owe roughly $135 in total tax on that interest. The exact amount shifts with interest rates, your balance, and your tax bracket.
Key Takeaways
- Savings account interest is taxed as ordinary income at your federal tax bracket rate, not at a preferential rate.
- You will receive a Form 1099-INT from your bank if you earned $10 or more in interest, and you must report that amount on your tax return.
- Your state income tax rate also applies to savings interest in most states, though some states have no income tax.
- The tax you owe on interest depends on your total income and tax bracket for the year, not just the interest amount itself.
When the bank sends you Form 1099-INT
Your bank mails or makes available Form 1099-INT by January 31 each year for any interest earned in the prior calendar year. If you earned less than $10 in interest, the bank is not required to send the form, but you still owe tax on that interest if you have any tax liability.
You receive one copy of the form, and the IRS receives another. The form shows the account number, the interest amount, and sometimes U.S. savings bond interest or other types of interest if you hold those products at the same institution. If you have accounts at multiple banks or credit unions, you will get a separate 1099-INT from each one.
When you file your federal tax return, you report the total interest from all your 1099-INT forms on Schedule 1 (Form 1040), which feeds into your taxable income. If you use tax software, you can enter the 1099-INT information directly, and the software calculates your tax liability.
How your tax bracket determines what you owe
Federal income tax brackets change each year and depend on your filing status — single, married filing jointly, head of household, or married filing separately. For 2024, a single filer in the 12% bracket earns between roughly $11,600 and $47,150. Someone in that bracket pays 12% on each additional dollar of income, including savings interest.
If you earn $500 in savings interest and you are in the 12% bracket, you owe $60 in federal tax on that interest (before any credits or deductions). If you are in the 22% bracket, you owe $110. The brackets are progressive, meaning higher income pushes you into higher brackets, so a large interest amount could push you into a higher tax bracket for that portion of income.
Your state tax works similarly. Most states tax interest at their ordinary income rate. Some states offer small exemptions — for example, Illinois exempts interest from certain savings accounts for residents over 65 — but these are rare and narrow. Check your state's tax authority website or your state's tax form instructions to see whether your state has any exemptions.
Strategies to reduce tax on savings interest
You cannot avoid tax on savings interest, but you can reduce the amount you owe by earning less interest. This sounds counterintuitive, but it reflects a real trade-off: keeping money in a low-interest savings account or money market fund means less interest income and therefore less tax, but also less growth.
Some people use tax-advantaged accounts to hold savings. A traditional IRA or 401(k) allows you to save money and earn interest without paying tax on that interest each year — you pay tax only when you withdraw the money in retirement. A Roth IRA lets you earn interest tax-free if you follow the withdrawal rules. These accounts have contribution limits and withdrawal restrictions, so they work best for longer-term savings, not emergency funds.
High-yield savings accounts and money market accounts earn more interest than regular savings accounts, so they generate more tax. But they also grow your money faster. The tax on the extra interest is usually worth paying if you have a long time horizon and do not need the money soon.
What happens if you do not report the interest
The IRS receives a copy of every 1099-INT your bank sends. If you do not report the interest on your tax return, the IRS will notice the mismatch between what the bank reported and what you reported (or did not report). The IRS may send you a notice asking you to pay the tax owed, plus interest and penalties.
The penalty for not reporting income is typically 20% of the underpaid tax, though it can be lower if you have reasonable cause. Interest accrues on the unpaid tax from the original due date. So if you owed $60 in tax on savings interest and did not pay it, you might end up owing $72 or more by the time the IRS catches up.
If you made an honest mistake, you can file an amended return (Form 1040-X) to report the interest and pay what you owe. Filing an amended return before the IRS contacts you may reduce or eliminate penalties.
Savings interest versus other types of investment income
Savings account interest is taxed as ordinary income. This is different from capital gains — the profit you make when you sell a stock or mutual fund at a higher price than you paid. Long-term capital gains (assets held over one year) are taxed at preferential rates of 0%, 15%, or 20%, which are usually lower than ordinary income rates.
Dividends from stocks and mutual funds can also be taxed at preferential rates if they are "may have access to dividends." Interest from bonds and bond funds is taxed as ordinary income, like savings interest. Certificates of deposit (CDs) are also taxed as ordinary income on the interest earned.
If you are trying to minimize tax on your savings, understanding these differences matters. A high-yield savings account earning 4.5% interest is taxed as ordinary income. A dividend-focused stock fund earning 2% in may have access to dividends might be taxed at 15%, which could be lower depending on your bracket. But stock funds also carry market risk, whereas savings accounts are FDIC-insured up to $250,000.
State-specific tax rules for savings interest
Most states tax savings interest at the same rate as ordinary income. However, a few states have special rules. Illinois exempts interest earned by residents age 65 and older on savings accounts and CDs. Some states offer small exemptions for interest on certain types of accounts or for low-income filers.
If you live in a state with no income tax — Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming — you owe no state tax on savings interest, only federal tax. If you moved to a no-income-tax state during the year, you may owe tax to your previous state on interest earned while you lived there, depending on when you moved and your state's rules.
Check your state's department of revenue website or your state tax form instructions for any exemptions or special rules. Some states also allow you to claim a small exemption for interest if your total income is below a certain threshold.
Frequently Asked Questions
Do I have to report savings 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 that interest if you have any tax liability for the year. Report it on your tax return even if you do not receive a form.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. Account fees are not deductible against interest income. However, if you paid investment advisory fees or tax preparation fees, those may be deductible under certain circumstances — check with a tax professional.
What if I earned interest in a joint account with someone else?
The bank typically reports the full interest amount on a single 1099-INT. You and the other account holder must decide how to split the interest for tax purposes, usually based on who contributed what to the account. Report your share on your tax return and keep records of the split in case the IRS asks.
Does interest from a money market account get taxed differently than savings account interest?
No. Money market accounts are taxed the same way as savings accounts — the interest is reported on Form 1099-INT and taxed as ordinary income at your federal and state rates. The only difference is that money market accounts often earn higher interest, so you owe more tax.
What if my savings account is in a trust or business account?
A trust or business account generates interest that is taxed to the trust or business entity, not to you personally. The bank will send a 1099-INT to the trust or business, and the trust or business files its own tax return reporting that interest. Ask your bank or a tax professional how the interest should be reported for your specific situation.