Interest counts as income the IRS taxes every year
Yes, the interest your savings account earns is taxable income. The bank or credit union pays you interest, and the IRS treats that money the same way it treats wages or salary — you have to report it on your tax return and pay income tax on it.
The amount of tax you owe depends on your total income for the year and your tax bracket. If you earn $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're in the 12% bracket, you'll owe about $6. State income tax may apply on top of that, depending on where you live.
You don't pay tax on the interest when you earn it. Instead, you report it when you file your tax return the following year. The bank sends you a form called a 1099-INT in January or early February that shows exactly how much interest you earned in the previous year.
Key Takeaways
- All interest earned on savings accounts, money market accounts, and certificates of deposit is taxable income that you report on your federal tax return.
- Banks send you a 1099-INT form by January 31 showing the interest you earned; you use this form to report the income when you file taxes.
- You owe tax at your regular income tax rate, which varies based on your total income and tax bracket, not a special interest rate.
- If you earned less than $10 in interest during the year, the bank may not send a 1099-INT, but you still have to report the interest if you file a tax return.
- High-yield savings accounts earn more interest than traditional savings accounts, which means you'll owe more tax on the earnings.
How the 1099-INT form works and when you get it
Your bank or credit union is required to send you a 1099-INT form by January 31 each year if you earned $10 or more in interest during the previous calendar year. This form shows the total interest paid to you across all accounts you hold at that institution.
If you have accounts at multiple banks, you'll receive a separate 1099-INT from each one. The form lists your name, address, Social Security number, and the exact dollar amount of interest earned. The bank keeps a copy and sends one to you and one to the IRS.
When you file your tax return, you report the interest shown on the 1099-INT on your Form 1040 or Form 1040-SR. The interest goes on Schedule 1 (Other Income) if you're using the standard form. If you use tax software, it usually walks you through entering the 1099-INT information, and the software calculates where it belongs on your return.
What happens if you earned interest but didn't get a 1099-INT
If you earned less than $10 in interest during the year, your bank is not required to send you a 1099-INT. However, you still have to report that interest on your tax return if you file one. This is true even if the amount is small — $2 in interest still counts as taxable income.
You can find the interest amount by logging into your online banking account or calling the bank and asking for your interest earnings for the tax year. Many banks show this information on your year-end statement or in a summary section of your account.
If you file a tax return and you earned any interest at all, report it. The IRS has records from the bank even if a 1099-INT wasn't issued, and mismatches between what you report and what the bank reported can trigger an audit notice.
Different account types and how interest is taxed
Interest from savings accounts, money market accounts, and certificates of deposit (CDs) are all taxed the same way — as ordinary income at your regular tax rate. There's no special lower rate for savings interest.
High-yield savings accounts earn significantly more interest than traditional savings accounts, sometimes 4% to 5% annually compared to 0.01% or less at big banks. This means you'll owe more tax on the earnings. If you have $10,000 in a high-yield account earning 4.5%, you'll earn $450 in interest and owe tax on that full amount.
Interest from bonds, Treasury bills, and money market funds is also taxable, though the rules vary slightly. Treasury interest is exempt from state income tax but not federal tax. Municipal bonds are often tax-free at both levels, but that's a different category from savings account interest.
How your tax bracket affects what you owe on interest
The tax rate you pay on interest depends on your total income for the year and your filing status. The IRS sets tax brackets that change each year. For 2024, if you're single and your total income falls between roughly $11,600 and $47,150, you're in the 12% bracket. Income between $47,150 and $100,525 is taxed at 22%, and so on.
Interest is added to your other income to determine which bracket you fall into. If you earn $45,000 in wages and $500 in interest, your taxable income is $45,500. That extra $500 might push you into a higher bracket, meaning you pay tax on it at a higher rate than you would if you had no other income.
This is why high-yield savings can be less attractive for people in higher tax brackets — the interest earnings are taxed at 24%, 32%, or higher depending on your income level. Someone in the 35% bracket earning $1,000 in interest owes $350 in federal tax alone.
State income tax on savings interest
Most states tax savings account interest as ordinary income, applying their state income tax rate on top of federal tax. A few states don't have income tax at all — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — so residents of those states owe only federal tax on interest.
State tax rates vary widely. New York taxes interest at rates up to 10.9%, while Colorado taxes it at up to 4.63%. If you live in a high-tax state and earn significant interest, the combined federal and state tax can be substantial.
Some states offer small exemptions for interest earned on savings accounts held by residents over a certain age, but these are rare and usually apply only to very small amounts. Check your state's tax authority website or ask a tax professional if you think you might may have access to for an exemption.
Strategies to reduce taxable interest income
You can't avoid paying tax on interest you've earned, but you can structure your savings to minimize how much interest you earn in taxable accounts. One approach is to use a Roth IRA or Roth 401(k) — interest earned inside these accounts is not taxed, and you don't report it on your tax return.
Another option is to hold savings in a traditional IRA or 401(k). Interest earned inside these accounts is also tax-deferred, meaning you don't pay tax until you withdraw the money in retirement. This can be useful if you expect to be in a lower tax bracket later.
For money you need to access before retirement, there's no way to avoid the tax on interest earned in regular savings accounts. However, you can reduce the amount of interest you earn by keeping only what you need for emergencies in a savings account and investing longer-term money in other vehicles.
Frequently Asked Questions
Do I have to report interest if I only earned a few dollars?
Yes, if you file a tax return, you must report all interest you earned, even if it's $1 or $2. The bank may not send a 1099-INT for amounts under $10, but you still have to report it. The IRS tracks interest reported by banks, and omitting small amounts can trigger a mismatch notice.
What if I earned interest but the bank didn't send me a 1099-INT?
Contact the bank and ask for a copy or ask them to resend it. If they can't provide one, you can still report the interest based on your account statements or year-end summary. Keep records showing how much you earned so you can back up your tax return if needed.
Can I deduct anything against the interest I earned?
No, you cannot deduct expenses or losses against interest income on your personal tax return. Interest is reported as income in full. However, if you have investment losses in other accounts, you may be able to use those to offset some of your overall income, depending on the type of loss.
Is interest from a CD taxed differently than interest from a savings account?
No, CD interest is taxed the same way as savings account interest — as ordinary income at your regular tax rate. You report it on your tax return using the 1099-INT the bank sends you, just like savings interest.
What if I closed my account during the year — do I still owe tax on the interest?
Yes, you owe tax on all interest earned during the year, regardless of when you close the account or withdraw the money. The interest is taxable income for the year it was earned, not the year you withdraw it.