Interest counts as income the IRS taxes every year
Yes, the interest your savings account earns is taxable. The IRS treats it as ordinary income, the same way it treats wages or salary. You owe federal income tax on every dollar of interest your bank pays you, no matter how small the amount.
Your bank will send you a Form 1099-INT at the end of the year if you earned $10 or more in interest during that tax year. You report this amount on your tax return. Even if you don't receive a 1099-INT because your interest was under $10, you still owe tax on it — you just have to track it yourself.
The tax rate you pay depends on your overall income and tax bracket. Interest is added to your other income to determine which bracket you fall into. If you're in the 22% federal tax bracket, for example, that interest gets taxed at 22%. Some states also tax interest income, though a few states exempt it entirely.
Key Takeaways
- Banks report interest of $10 or more on Form 1099-INT, which you receive by January 31 and must report on your tax return.
- Interest is taxed as ordinary income at your marginal tax rate, which depends on your total income for the year.
- Some states do not tax interest income, while others tax it at rates ranging from 1% to over 5%, depending on where you live.
- You can reduce taxable interest by holding money in tax-advantaged accounts like Roth IRAs or 529 plans, though these have contribution limits and rules.
When your bank reports interest to the IRS
Your bank is required to report interest to both you and the IRS using Form 1099-INT. This form arrives in your mailbox or email by January 31 of the year following the tax year in which you earned the interest. For example, interest you earn in 2024 gets reported on a 1099-INT you receive by January 31, 2025.
The threshold is $10. If your account earned $10 or more in interest during the calendar year, the bank must issue a 1099-INT. If you earned less than $10, the bank is not required to send one, but the interest is still taxable and you should report it.
You'll receive the form in multiple copies — one for your records, one for the IRS, and sometimes one for your state tax authority. The form shows your account number, the bank's name and tax ID, and the total interest paid. Keep this form with your tax records.
How interest income affects your tax bracket
Interest is added to your other income — wages, self-employment income, capital gains, and so on — to calculate your total taxable income for the year. That total determines which tax bracket you fall into, and therefore what rate you pay on the interest.
If you earned $50,000 in wages and $500 in savings account interest, your taxable income is $50,500. The interest doesn't get taxed at a separate rate; it's taxed at whatever your marginal rate is based on that $50,500 total. For the 2024 tax year, if you're single, that puts you in the 22% bracket, so roughly $110 of your $500 interest goes to federal tax.
This matters because it means high earners pay more tax on the same interest than lower earners do. Someone in the 37% bracket pays 37 cents in federal tax on every dollar of interest, while someone in the 10% bracket pays 10 cents.
State taxes on savings account interest
Federal tax is only part of the picture. Most states also tax interest income, though the rates and rules vary widely. Nine states have no income tax at all — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends). If you live in one of these, you owe no state tax on your interest.
In states that do tax interest, the rate depends on your state income tax bracket. New York, for example, taxes interest at rates up to 10.9%. California taxes it at rates up to 13.3%. Some states have flat taxes — Illinois taxes interest at 4.95% regardless of your income level.
A few states offer partial breaks. Vermont allows a deduction for interest income below a certain threshold. Some states exempt interest earned in certain retirement accounts. Check your state's tax authority website or a tax professional to understand your state's specific rules.
Accounts that reduce or eliminate tax on interest
If you want to earn interest without paying tax on it immediately, certain accounts let you do that. A Roth IRA lets you contribute money that grows tax-free, and you pay no tax on the interest or withdrawals in retirement, as long as you follow the rules. A 529 college savings plan works the same way for education expenses — interest grows tax-free if you use the money for tuition, fees, or room and board.
These accounts have limits. For 2024, you can contribute up to $7,000 per year to a Roth IRA (or $8,000 if you're 50 or older). 529 plans have higher contribution limits but are tied to a specific beneficiary and specific uses. Money withdrawn for non-education purposes from a 529 gets taxed and penalized.
A high-yield savings account does not reduce taxes — it just pays more interest, so you earn more taxable income. The tradeoff is higher interest now versus higher taxes now. A regular savings account at a traditional bank might pay 0.01% interest, while a high-yield account might pay 4% or 5%, but all of it is taxable.
Reporting interest on your tax return
When you file your federal tax return, you report interest income on Schedule 1 (Form 1040), line 8b. If you received a 1099-INT, use the amount shown in box 1 of that form. If you earned interest but didn't receive a 1099-INT because it was under $10, you still report it — you just have to calculate it yourself by checking your bank statements.
If you have multiple savings accounts or received multiple 1099-INTs, add them all together and report the total. The IRS matches the 1099-INT your bank sends them against what you report, so make sure the numbers match.
On your state tax return, you typically report interest income on a similar line. Some states have a separate schedule for interest and dividend income. Your state tax form or instructions will tell you where to report it.
What happens if you don't report interest income
The IRS receives a copy of every 1099-INT your bank sends you. If you don't report the interest on your tax return, the IRS will notice the discrepancy when they match your return against the forms they received. This can trigger a notice asking you to explain the difference, or in some cases, the IRS will assess the tax and penalties on your behalf.
Even small amounts matter. Failing to report $50 in interest might seem minor, but it can result in a letter from the IRS and potentially penalties and interest charges on top of the tax owed. It's simpler and cheaper to report it correctly the first time.
If you discover you missed reporting interest in a prior year, you can file an amended return (Form 1040-X) for that year. The sooner you do this, the better — the IRS is more likely to view it as an honest mistake rather than intentional evasion.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. The $10 threshold only determines whether your bank must send you a 1099-INT. You still owe tax on any interest you earned, even if it's $1. Track it from your bank statements and report it on your return.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount the bank paid you. Fees are not deductible against interest income on your personal tax return, though they may reduce your net interest earnings.
What if I moved money between banks mid-year and got two 1099-INTs?
Add both 1099-INTs together and report the total on your tax return. The IRS expects to see the sum of all interest you earned during the year, regardless of how many accounts or banks you used.
Does interest in a joint savings account get split between both owners for tax purposes?
Not automatically. The bank reports the full interest amount to the IRS under the Social Security number of the account owner listed first on the account. You and the other owner need to decide how to split the tax liability and report it correctly on your individual returns. This is a situation where a tax professional can help.
Is interest from a money market account taxed the same way as a savings account?
Yes. Money market accounts, certificates of deposit (CDs), and regular savings accounts all earn interest that is taxed as ordinary income. The bank reports it on a 1099-INT the same way.