Interest income counts as ordinary income on your federal tax return
Yes, the interest your savings account earns is taxable. The IRS treats it as ordinary income, which means you report it on your federal tax return the same way you would report wages or salary. The bank or credit union holding your account will send you a Form 1099-INT each January showing how much interest you earned during the previous year, and you use that number when you file.
The amount of tax you owe depends on your total income and your tax bracket. If you earned $50 in interest and you're in the 22% tax bracket, you'll owe roughly $11 in federal tax on that interest alone. If you earned $500 in interest, you'd owe roughly $110. The exact amount varies based on your filing status, other income, and deductions.
State income tax also applies to savings account interest in most states. A handful of states—including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—don't tax income at all, so residents there owe no state tax on interest. Every other state taxes it at rates ranging from roughly 1% to 13%, depending on where you live and your income level.
Key Takeaways
- The IRS requires you to report all savings account interest as income on your federal tax return, using the Form 1099-INT your bank sends you.
- You pay federal income tax on interest at your marginal tax rate, which depends on your total income and filing status.
- Most states also tax savings account interest, though eight states have no income tax at all.
- You must report interest even if the amount is small, though banks only send Form 1099-INT if interest exceeds $10 in a year.
- High-yield savings accounts earn more interest than traditional accounts, which means a larger tax bill on that interest.
When you have to report interest on your tax return
You report interest income on your federal return using Schedule B (Interest and Ordinary Dividends), which attaches to Form 1040. You list each account separately if you have more than one, though many people combine them into a single line if the total is small. The total goes into your adjusted gross income (AGI), which affects your tax bracket and may change how much you owe.
Banks send Form 1099-INT only if your interest exceeds $10 during the calendar year. If you earned $8 in interest, the bank won't send you a form—but you still owe tax on it. You're responsible for reporting all interest, whether or not you receive a 1099-INT. The IRS gets a copy of every 1099-INT sent to you, so if you don't report interest that appears on a form, the IRS will likely catch it.
If you have multiple accounts at different banks, each one may send its own 1099-INT. Combine all of them when you file. If you have accounts at the same bank, the bank may combine them into a single 1099-INT or send separate forms depending on how the accounts are registered.
How high-yield savings accounts change your tax bill
High-yield savings accounts currently pay 4% to 5% annual interest, compared to 0.01% to 0.5% at traditional savings accounts. That difference means much more interest income and a much larger tax bill. If you have $10,000 in a high-yield account earning 4.5%, you'll earn roughly $450 in interest per year. At a 22% federal tax rate, that's about $99 in federal tax owed on that interest alone, plus state tax.
The tax impact is real enough that some people move money between account types depending on the year. If you're in a low-income year, keeping money in a high-yield account may make sense because you'll owe less tax. If you're in a high-income year, you might temporarily move money to a lower-yield account to reduce your tax bill, though the interest savings are usually small compared to the account's growth.
Money market accounts and certificates of deposit (CDs) work the same way: all interest is taxable and reported on Form 1099-INT. The rate doesn't matter—whether you earn 0.5% or 5%, you owe tax on every penny.
Tax-advantaged alternatives to regular savings accounts
If you want to save money without paying tax on the interest, you have a few options. A Roth IRA lets you contribute up to $7,000 per year (or $8,000 if you're 50 or older), and all interest earned inside the account is tax-free as long as you follow the withdrawal rules. A traditional IRA lets you defer taxes until you withdraw the money in retirement. A 529 college savings plan lets you save for education expenses tax-free if the money is used for tuition, room and board, or other may have access to costs.
Health Savings Accounts (HSAs) also grow tax-free if you have a high-deductible health plan. You can contribute up to $4,150 per year (or $8,300 for families), and interest earned is never taxed as long as you use the money for medical expenses.
These accounts have contribution limits and withdrawal rules, so they're not a replacement for a regular savings account. But if you have money you won't need for several years, moving it into one of these accounts can eliminate the tax on interest entirely.
What happens if you don't report interest income
The IRS receives a copy of every Form 1099-INT sent to you. If you don't report the interest on your tax return, the IRS will notice the mismatch between what you reported and what the bank reported. This triggers an automated notice asking you to pay the tax owed, plus interest and penalties.
The penalty for not reporting income is usually 20% of the unpaid tax, though it can be higher if the IRS determines the omission was intentional. Interest accrues on the unpaid tax at roughly 8% per year. If you owed $100 in tax on interest and didn't report it, you might end up owing $120 to $130 by the time the IRS catches up with you.
If you realize you missed reporting interest from a prior year, you can file an amended return (Form 1040-X) for that year. Filing an amendment before the IRS contacts you usually results in lower penalties than waiting to be caught.
Reporting interest when you inherit an account
If you inherit a savings account, you owe tax on the interest that accrues after the original owner's death, not on the account balance itself. The estate may owe tax on interest earned before death, depending on the size of the estate and how it's structured.
When you inherit an account, the bank will send you a Form 1099-INT for the interest earned during the year of inheritance. Report it on your tax return the same way you would report interest from your own account. The original owner's estate handles any interest earned before death.
Frequently Asked Questions
Do I have to report interest if I only earned a few dollars?
Yes. The IRS requires you to report all interest income, regardless of the amount. Banks only send Form 1099-INT if interest exceeds $10, but you're responsible for reporting smaller amounts too. The IRS has records of your account and will notice if you don't report it.
What if my bank didn't send me a 1099-INT?
If you earned less than $10 in interest, the bank isn't required to send a form. You still owe tax on it and must report it on your return. If you earned more than $10 and didn't receive a form, contact the bank and ask them to send one. You can also call the IRS at 800-829-1040 to request a copy.
Can I deduct the taxes I pay on savings account interest?
No. Interest income is taxable, but the tax you pay on it is not deductible. You report the interest as income and pay tax at your marginal rate. There's no offsetting deduction.
Does interest from a joint savings account get split between owners for tax purposes?
Not automatically. The bank reports all interest to the Social Security number listed as the primary account holder on the Form 1099-INT. If you own the account jointly but only one person's name is on the tax form, that person is responsible for reporting it—though you may need to split the actual tax liability between you depending on your agreement. Consult a tax professional if you're unsure how to handle a joint account.
Is interest from a savings account at a credit union taxed differently?
No. Credit unions are treated the same as banks for tax purposes. Interest earned at a credit union is taxable income and reported on Form 1099-INT just like interest from a bank account.