Savings account interest counts as income on your tax return
Interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or freelance earnings — you have to report it, and you may owe federal income tax on it. Your state may tax it too, depending on where you live.
The amount matters less than you might think. Even $5 in interest is technically taxable. But the real tax bill depends on your total income for the year and your tax bracket. Someone earning $30,000 a year will owe tax on $50 in interest; someone earning $150,000 will owe more tax on the same $50.
Your bank will send you a form called a 1099-INT if you earned $10 or more in interest during the year. You use that form to report the interest on your tax return. If you earned less than $10, the bank does not have to send the form, but you still have to report the interest if you file a return.
Key Takeaways
- All savings account interest is taxable income, even amounts under $10, though banks only send a 1099-INT form if interest reaches $10 or more.
- You report interest income on your federal tax return using the 1099-INT your bank sends you, usually by January 31.
- The tax you owe depends on your total income and tax bracket, not just the interest amount.
- Some states do not tax interest income, while others tax it at the same rate as federal income tax.
- High-yield savings accounts pay more interest, which means a larger tax bill — but the account still makes financial sense if the after-tax return beats inflation.
When your bank sends you a 1099-INT form
The 1099-INT is the form banks use to report interest paid to you. Your bank mails it to you and files a copy with the IRS. You should receive it by January 31 of the year after you earned the interest.
Banks are required to send a 1099-INT only if the interest you earned was $10 or more during the calendar year. If you earned $9.50, you will not get a form. But you still owe tax on that $9.50 if you file a return — the form is just a convenience for reporting, not a threshold for taxation.
If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add up all the interest from all the forms and report the total on your tax return. If you moved money between accounts or closed an account mid-year, the interest still gets reported for the full year you earned it.
How interest income affects your tax bracket and refund
Interest income pushes your total income higher, which can move you into a higher tax bracket or reduce a refund you were expecting. The effect depends on how much interest you earned and what your other income was.
If you earned $35,000 in wages and $200 in interest, your taxable income is $35,200. That extra $200 is taxed at your marginal rate — the rate that applies to your highest dollars of income. For most people in the lower brackets, that is 10% or 12%, so $200 in interest costs roughly $20 to $24 in federal tax. But if you are near the edge of a higher bracket, the interest could push you over and cost more.
Interest income can also reduce tax credits you were counting on. Some credits, like the Earned Income Tax Credit, phase out as your income rises. An extra $500 in interest might reduce your EITC by $100 or more, depending on your situation. This is why high-yield savings accounts, which pay 4% to 5% interest, matter more to your taxes than regular savings accounts paying 0.01% — the tax bill is real.
State taxes on savings account interest
Federal tax is not the only tax on interest. Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. A few states do not tax interest at all.
States that do not tax interest income include: Alaska, Florida, Illinois, Indiana, Mississippi, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe federal tax on your interest but no state tax.
In states that do tax interest, the rate varies. New York taxes interest at your ordinary income tax rate, which can be as high as 10.9%. California taxes it at up to 13.3%. Some states have a flat tax on interest — Pennsylvania taxes interest and dividends at 3.07%, regardless of your income level. Check your state's tax website or ask a tax preparer what rate applies to you.
How to report interest on your tax return
You report interest income on Schedule B of Form 1040, the main federal income tax form. If you only have interest income and no other investment income, you can report it directly on line 1b of Form 1040 without filing Schedule B — but only if the interest is $1,500 or less.
The process is straightforward: write the name of each bank that paid you interest, the amount from each 1099-INT, and add them up. That total goes on your tax return. If you use tax software, it usually walks you through entering the 1099-INT information, and the software calculates the tax for you.
If you did not receive a 1099-INT but earned interest (because it was under $10), you still report it. Write "Interest not reported on 1099-INT" and the amount. The IRS does not always catch unreported small amounts, but reporting it is the correct thing to do and protects you if there is ever an audit.
Interest from joint accounts and accounts for minors
If you have a joint savings account with someone else, the interest belongs to whoever owns the account, not necessarily whoever earned it. If you and your spouse own the account jointly, you each report half the interest on your own tax return — unless your account agreement says otherwise. Check with your bank about how they report interest on joint accounts.
If you opened a savings account for a minor child, the interest is the child's income, not yours. The child has to report it on their own tax return if they file one. A child with only interest income and no other income may not have to file a return — the threshold depends on their age and whether they can be claimed as a dependent. A tax preparer or the IRS website can tell you whether your child needs to file.
Custodial accounts and Uniform Transfers to Minors Act (UTMA) accounts work the same way: the interest belongs to the minor and is reported on their return, even though you manage the account.
High-yield savings accounts and the tax trade-off
High-yield savings accounts pay 4% to 5% annual interest, compared to 0.01% or less at traditional banks. On $10,000, that is $400 to $500 a year instead of $1. But you owe tax on that higher interest, which reduces the benefit.
If you are in the 22% federal tax bracket and your state taxes at 5%, you owe 27% of the interest in taxes. On $400 in interest, that is about $108 in tax, leaving you with $292. That is still much better than the $1 you would earn at a traditional bank, but it is less than the $400 headline number.
The math still favors high-yield accounts for most people. Even after taxes, the after-tax return usually beats inflation, which means your money is actually growing in real value. But it is worth doing the calculation for your own situation to see whether the higher interest rate is worth the effort of moving your money.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. Banks only send a 1099-INT form if interest reaches $10, but you still owe tax on any interest you earned. Report it on your tax return even if you did not receive a form. The IRS expects you to report all income, regardless of whether a form was issued.
What if my bank sent me a 1099-INT with the wrong amount?
Contact your bank immediately and ask them to issue a corrected form. Once you receive the corrected 1099-INT, use that amount on your tax return. If you already filed with the wrong amount, you can file an amended return using Form 1040-X. Keep documentation of the correction in case the IRS asks.
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. However, if your bank charged you fees that exceeded the interest you earned, you report the net interest (interest minus fees) — but only if the bank reports it that way on the 1099-INT.
Does interest from a money market account get taxed the same way?
Yes. Money market accounts, money market funds, and certificates of deposit (CDs) all generate interest that is taxed as ordinary income. You report it the same way you report savings account interest, using the 1099-INT your bank or financial institution sends you.
What if I moved money between banks mid-year — do I report interest from both?
Yes. Each bank reports the interest it paid you during the year you earned it. If you had $5,000 at Bank A for six months and $5,000 at Bank B for six months, both banks send you a 1099-INT for their portion of the interest. You add both amounts together and report the total on your tax return.