Interest income is taxed as ordinary income at your federal tax rate
The interest your bank pays you on a savings account is treated as taxable income by the IRS. You pay tax on it at the same rate as wages or salary — not at the lower capital gains rate. The amount you owe depends on your total income for the year and which tax bracket you fall into.
Your bank reports the interest to the IRS on a Form 1099-INT if you earned $10 or more in interest during the tax year. You receive a copy and must report it on your tax return. Even if you don't receive a 1099-INT, you still owe tax on any interest you earned.
The federal tax rate on interest ranges from 10% to 37%, depending on your income level and filing status. Some states also tax interest income — the rate varies by state, and a few states don't tax it at all.
Key Takeaways
- Savings account interest is taxed as ordinary income at your federal tax bracket rate, which ranges from 10% to 37% depending on how much you earn.
- Your bank reports interest of $10 or more on Form 1099-INT, which you must include on your federal tax return.
- State income tax on interest varies by state — some states don't tax it, while others tax it at rates between 1% and 13%.
- You owe tax on interest even if your bank doesn't send you a 1099-INT, so track all interest earned across all accounts.
- High-yield savings accounts pay more interest, which means you owe more tax, but the after-tax return is still usually higher than traditional savings accounts.
Federal tax brackets for 2024 and how they apply to interest
The federal tax rate on your interest income depends on your taxable income — the total of all your income minus deductions. If you're single and earn $47,150 or less in 2024, you're in the 12% bracket. If you earn between $47,151 and $100,525, you're in the 22% bracket. The rates continue to climb: 24%, 32%, 35%, and 37% for the highest earners.
These brackets change each year. The IRS adjusts them for inflation, so the income ranges are different in 2025 than they were in 2024. When you file your tax return, you use the brackets for the year you earned the income.
Your interest income stacks on top of your other income. If you earn $50,000 in wages and $500 in interest, your taxable income is $50,500. That extra $500 is taxed at whatever bracket your total income falls into — in this case, the 22% bracket for a single filer.
State taxes on savings account interest
Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. State rates range from 1% to 13%, depending on the state. Nine states don't tax interest income at all: Alaska, Florida, Illinois, Mississippi, Nevada, South Dakota, Tennessee, Texas, and Wyoming.
A few states have special rules. New Hampshire and Tennessee tax only interest and dividends, not wages. Pennsylvania taxes interest at a flat 3.07% rate, separate from its regular income tax brackets. If you live in one state but earn interest from an account in another, you owe tax to your state of residence, not the state where the bank is located.
When you file your state tax return, you report the same interest income you reported to the IRS. Your state tax bill is calculated separately using your state's tax brackets and rules.
How to report interest income on your tax return
You report interest income on Schedule B of Form 1040, the main federal tax form. If you earned interest from only one account and received a 1099-INT, you can often report it directly on your return without filing Schedule B — but you still need to include the amount somewhere on your return.
List each account separately if you earned interest from multiple banks or investment accounts. Add up all the interest and enter the total on line 2b of Form 1040. If you use tax software, it will guide you through entering this information and calculating your tax liability.
Keep copies of all 1099-INT forms you receive. If you earned interest but didn't receive a 1099-INT (which can happen if the amount was under $10 or the bank made an error), you still report it. Check your year-end account statements for the exact amount.
When you might owe estimated tax payments
If you earn a large amount of interest — usually $1,000 or more — and don't have taxes withheld from other income, you may need to make estimated tax payments to the IRS four times a year. This applies mainly to people who are retired, self-employed, or have significant investment income.
Estimated payments are due on April 15, June 15, September 15, and January 15 of the following year. You calculate them using Form 1040-ES, which estimates your total tax for the year and divides it into four payments. If you don't make these payments and owe a large amount at tax time, you may owe a penalty.
If you're unsure whether you need to make estimated payments, use the IRS worksheet on Form 1040-ES or speak with a tax professional. Many people with modest interest income don't need to make these payments because their total tax bill is small.
Interest from high-yield savings accounts and money market accounts
High-yield savings accounts and money market accounts pay significantly more interest than traditional savings accounts — sometimes 4% to 5% annually, compared to 0.01% or less at many regular banks. The tradeoff is that you owe more tax on the higher interest.
If you earn $5,000 in interest from a high-yield account at a 22% tax rate, you owe $1,100 in federal tax. Your after-tax return is $3,900. Even after taxes, the high-yield account usually comes out ahead of a traditional account, but the tax impact is real and worth calculating before you move money.
Some people use high-yield accounts for short-term savings and traditional accounts for money they're holding temporarily. Others accept the tax hit because the interest earned is still more than they'd make elsewhere. The choice depends on your tax bracket and how much you're saving.
Tax-advantaged alternatives to regular savings accounts
If you want to earn interest without paying tax on it every year, you have a few options. Roth IRAs and Roth 401(k)s allow you to earn interest tax-free, though you can only contribute a limited amount each year and you can't touch the money until age 59½ without penalties. Traditional IRAs and 401(k)s let you defer taxes on interest until you withdraw the money in retirement.
Series I Bonds and Series EE Bonds issued by the U.S. Treasury don't require you to pay federal tax on the interest until you cash them in, which can be years later. You also avoid state and local taxes on bond interest. The tradeoff is that your money is locked up for at least one year, and you pay a penalty if you cash them in before five years.
For most people with modest savings, a regular high-yield savings account is still the best choice because the money stays accessible and the interest is higher than bonds. But if you have a large amount to save and can afford to lock it away, tax-deferred accounts may save you money over time.
Frequently Asked Questions
Do I owe tax on interest if I earned less than $10?
Yes. The $10 threshold only determines whether your bank sends you a 1099-INT form. You owe tax on all interest you earn, regardless of the amount. If you earned $5 in interest, you report it on your tax return.
What if I have interest from multiple accounts at different banks?
Add up the interest from all accounts and report the total on your tax return. You don't need to file separate forms for each account — one total line on Schedule B covers all of them. Keep the 1099-INT forms from each bank for your records.
Can I deduct the taxes I pay on interest income?
No. Interest income is added to your other income, and you pay tax on the total. You can't deduct the tax itself. However, if you paid interest on a loan to buy investments, that investment interest may be deductible under certain conditions — ask a tax professional.
Do I owe tax on interest if I'm retired and don't work?
Yes. Interest is taxable income even if it's your only income. If your total income is below the standard deduction for your age and filing status, you may not owe federal tax, but you still report the interest on your return.
What happens if I don't report interest income on my tax return?
The IRS receives a copy of your 1099-INT from the bank and will notice if you don't report it. You may face penalties and interest charges on the unpaid tax. It's simpler and cheaper to report it correctly when you file.