The short answer: your savings account itself is not taxed, but the interest it earns is
A savings account is not subject to tax just for existing. However, the interest your bank pays you on the money in that account counts as income, and you owe federal income tax on it. Most banks report this interest to the IRS on a Form 1099-INT, and you report it on your tax return. The amount of tax you pay depends on your overall income and tax bracket, not on the size of your savings account.
State income tax works the same way in most states — the interest is taxable income. A few states (like Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) do not have state income tax at all, so residents there owe federal tax on savings interest but not state tax.
Key Takeaways
- Banks report savings interest to the IRS on Form 1099-INT when you earn $10 or more in a year, and you must report it as income on your tax return.
- The interest rate your bank pays varies widely — from nearly 0% at traditional banks to 4% to 5% at online banks — which directly affects how much tax you owe.
- You pay tax on interest in the year you earn it, even if you do not withdraw the money from the account.
- Some savings accounts and certificates of deposit held in retirement accounts like IRAs or 401(k)s are tax-deferred or tax-free, but regular savings accounts are not.
When your bank reports interest to the IRS
Your bank sends Form 1099-INT to both you and the IRS if you earned $10 or more in interest during the calendar year. You receive this form by January 31 of the following year. If you earned less than $10, your bank may not issue a 1099-INT, but you still owe tax on that interest — you have to report it yourself.
The form shows the total interest paid to you during the year. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. When you file your tax return, you add up all the interest from all your accounts and report it on Schedule B (Interest and Ordinary Dividends) if the total is over $1,500, or directly on Form 1040 if it is $1,500 or less.
How interest rates affect the tax you owe
The higher your bank's interest rate, the more interest you earn, and the more tax you owe. A savings account earning 0.01% annually on $10,000 generates $1 in interest — barely taxable. A high-yield savings account earning 4.5% on the same $10,000 generates $450 in interest, which is real taxable income.
Your actual tax bill depends on your tax bracket. If you are in the 22% federal tax bracket and earn $450 in interest, you owe roughly $99 in federal tax on it (plus any state income tax). If you are in the 12% bracket, you owe roughly $54. The interest itself is always taxable; the rate at which you pay tax on it depends on your total income for the year.
Interest earned in retirement accounts is different
If you hold a savings account or certificate of deposit inside a traditional IRA or 401(k), the interest is not taxed in the year you earn it. Instead, you pay tax when you withdraw the money in retirement. This is called tax-deferred growth.
A Roth IRA or Roth 401(k) works differently: interest grows tax-free, and you owe no tax on withdrawals in retirement (as long as you follow the rules). Regular savings accounts outside retirement accounts do not get this treatment — they are always taxable in the year the interest is earned.
What to do if you do not receive a 1099-INT
If you earned interest but your bank did not send you a 1099-INT, you still have to report it. This happens most often when you earned less than $10, or when you closed an account partway through the year. Check your bank statements for the interest deposits, add them up, and report the total on your tax return.
If you earned $10 or more and did not receive a 1099-INT by early February, contact your bank and ask for it. If the bank cannot provide one, you can still file your return with the interest amount you calculated from your statements — just keep those statements in case the IRS asks questions later.
How to reduce taxable interest income
You cannot avoid tax on savings interest, but you can reduce how much interest you earn (and thus how much you owe tax on) by keeping money in low-interest accounts. Traditional banks often pay 0.01% or less, generating minimal taxable interest. The trade-off is that your money grows very slowly.
Another approach is to use tax-advantaged accounts: max out contributions to a 401(k) or traditional IRA first, since that money grows tax-deferred. Once you have exhausted those, high-yield savings accounts still make sense for emergency funds even though the interest is taxable — the growth outweighs the tax cost for money you need to access quickly.
Frequently Asked Questions
Do I have to report savings interest if I earned less than $10?
Yes. The $10 threshold is when your bank must send you a 1099-INT form, but you still owe tax on all interest you earn. Report it on your tax return even if you do not receive a form.
What if I earned interest but closed the account before the end of the year?
You still owe tax on the interest you earned while the account was open. Your bank will report it on a 1099-INT for the year you earned it, or you can calculate it from your statements and report it yourself.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount as income. Savings account fees are not deductible on your personal tax return (though they may be deductible if the account is for a business).
Is interest from a money market account taxed the same way as a savings account?
Yes. Money market accounts, certificates of deposit, and regular savings accounts all generate taxable interest reported on Form 1099-INT. The tax treatment is identical.
What happens if my bank reports the wrong amount of interest on my 1099-INT?
Contact your bank immediately and ask for a corrected form (called an amended 1099-INT). If you already filed your return, you can file an amended return using Form 1040-X once you have the corrected form.