Yes, savings account interest counts as taxable income at your ordinary tax rate
The interest your bank pays you on a savings account is ordinary income, which means it gets taxed at the same rate as your wages or salary. The IRS treats it the same way it treats any money you earn. If you earn $100 in interest, that $100 is added to your total income for the year, and you owe tax on it based on your tax bracket.
This matters for tax refunds because if you're waiting for a refund and you deposit it into a savings account, any interest that account earns between now and when you file next year will be taxable. It's usually a small amount, but it still has to be reported.
The bank will send you a Form 1099-INT in January if you earned $10 or more in interest during the year. You report that number on your tax return, and it increases your taxable income. There's no separate tax rate for savings interest — it's just added to everything else you earned and taxed at your marginal rate.
Key Takeaways
- Savings account interest is taxed as ordinary income at your regular tax rate, not at a special lower rate.
- Your bank will send you a Form 1099-INT in January if you earned $10 or more in interest during the year.
- You report the interest amount on your tax return as income, which increases your total taxable income for that year.
- Even small interest amounts must be reported; the IRS matches 1099-INT forms to tax returns automatically.
- High-yield savings accounts earn more interest, which means you'll owe more tax on that interest.
How the IRS gets the interest information
Banks report all interest payments to the IRS on Form 1099-INT. They send a copy to you and a copy to the IRS. The IRS then cross-checks the interest reported on your tax return against what the bank reported. If the numbers don't match, you'll get a notice.
The $10 threshold means that if you earn less than $10 in interest, the bank doesn't have to send you a 1099-INT. But you still have to report the interest if you earned it. Many people with small savings balances won't hit $10 in a year, so they won't receive a form — but if they do earn interest, they should still report it.
High-yield savings accounts currently pay between 4% and 5% annually, depending on the bank and the current interest rate environment. A $10,000 deposit in a high-yield account could earn $400 to $500 in a year, which is definitely reportable and definitely taxable.
Where to report savings interest on your tax return
If you use Form 1040 (the standard individual income tax form), savings interest goes on Schedule 1, line 8, labeled "Interest." If you're using tax software, it will ask you for the amount from your 1099-INT and put it in the right place automatically.
The interest is added to your other income — wages, self-employment income, capital gains, and so on. Your total income is then reduced by any deductions you're may have access to to, and the result is your taxable income. Your tax is calculated on that taxable income.
If you have multiple savings accounts or CDs, each bank sends a separate 1099-INT. You add all the interest amounts together and report the total on your return.
Why this affects your tax refund amount
If you're expecting a refund, adding interest income to your return can change the size of that refund. More income means more tax owed (unless you have offsetting deductions or credits). If you had too much withheld from paychecks during the year, you might still get a refund — but it will be smaller than it would have been without the interest income.
The effect is usually small. On $100 in interest, if you're in the 22% tax bracket, you'd owe about $22 in additional tax. But if you're in the 12% bracket, it's about $12. If you're in the 37% bracket (the highest), it's about $37.
This is one reason some people move refunds into checking accounts or money market accounts instead of savings accounts while they wait to file. The interest earned is minimal over a few months, and it simplifies the tax picture. Others leave refunds in savings and simply account for the interest when they file the following year.
Certificates of Deposit (CDs) and other savings products
CDs, money market accounts, and savings bonds all work the same way as regular savings accounts from a tax perspective. The interest is ordinary income, reported on Form 1099-INT, and taxed at your regular rate.
CDs have one wrinkle: if you withdraw money before the maturity date, you usually pay an early withdrawal penalty. That penalty is deductible on your tax return (on Schedule 1, line 21), which offsets some of the tax on the interest. But the interest itself is still fully taxable.
Series I Savings Bonds are different. The interest on I Bonds is not taxed until you cash them in or they mature, which can be decades later. You can also defer the tax if you use the proceeds to pay for education. But regular savings accounts and CDs don't have that option.
Strategies if you want to minimize interest tax
The most straightforward approach is to keep refund money in a checking account instead of a savings account while you wait to file. Checking accounts typically earn no interest, so there's nothing to report. The trade-off is that you earn nothing on the money.
If you're holding a large refund for several months, a high-yield savings account will earn more interest than a regular savings account, but you'll owe more tax on that interest. The math usually favors the high-yield account — earning $200 in interest and owing $44 to $74 in tax (depending on your bracket) is better than earning $10 and owing $2 to $4.
Another option is to deposit the refund into a money market fund through a brokerage account. Money market funds are not FDIC-insured like bank accounts, but they're generally very safe. The interest is still taxable, but you have more control over when you receive the money and how it's invested.
What happens if you don't report the interest
The IRS will catch it. When the bank sends in the 1099-INT, the IRS receives a copy. If your tax return doesn't include that interest, the IRS will send you a notice asking why. You'll have to pay the tax you owe, plus interest on the unpaid tax, and possibly a penalty for underpayment.
The penalty is usually 20% of the underpaid tax if you were negligent, or 75% if the IRS considers it fraud. For small amounts of interest, the IRS is usually lenient if you correct it quickly, but it's not worth the hassle. Report it when you file.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
The bank doesn't have to send you a 1099-INT if you earned less than $10, but you still have to report the interest on your tax return if you earned any. The IRS expects you to report all income, regardless of whether you receive a form.
Can I deduct the tax I owe on savings interest?
No. Interest income is added to your total income, and you pay tax on it at your regular rate. You can't deduct the tax itself. You can only deduct investment expenses if they exceed 2% of your adjusted gross income, and that's a very high bar.
What if I earned interest in one year but didn't withdraw the money until the next year?
You report the interest in the year it was earned, not the year you withdraw it. Banks report interest on the 1099-INT in the year it was credited to your account, and that's the year you report it on your tax return.
Is interest from a joint savings account taxed differently?
Joint account interest is reported to both account holders. The bank will send a 1099-INT to each person, usually splitting the interest 50/50 unless you tell the bank otherwise. Each person reports their share on their own tax return.
Do I owe tax on interest if I'm not required to file a tax return?
Yes. Interest is income, and you owe tax on it even if you're not otherwise required to file. However, if your total income is below the filing threshold for your age and filing status, you may not owe any tax on the interest. You should still file to claim any refundable credits you're may have access to to.