Interest income from a savings account is taxable at the federal level and in most states

The money sitting in your savings account itself is not taxed. But the interest your bank pays you on that balance is taxable income. You report it on your federal tax return, and depending on where you live, on your state return as well. The bank will send you a Form 1099-INT each January showing how much interest you earned during the previous year.

The tax rate you pay on that interest depends on your overall income and tax bracket. Interest is treated as ordinary income, not capital gains, so it is taxed at your regular income tax rate—which could be anywhere from 10% to 37% at the federal level, depending on how much you earn. If you earned less than a certain threshold (which varies by year and filing status), you may owe no federal tax at all.

State income tax on savings interest also varies. Some states do not tax income at all. Others tax it the same way the federal government does. A few states have special rules for retirement accounts or very small amounts of interest. Check your state's tax authority website to learn what applies where you live.

Key Takeaways

  • Your bank sends you a Form 1099-INT in January reporting all interest earned in the previous year, and you must report this on your federal tax return.
  • Interest income is taxed at your regular income tax rate, which ranges from 10% to 37% federally depending on your total income.
  • Most states tax savings account interest as ordinary income, but a few states do not tax income at all.
  • If you earned very little interest, you may still need to report it even if you owe no tax, depending on your total income and filing status.

When you must report interest income to the IRS

The IRS requires you to report interest income on your tax return if you meet a minimum threshold. That threshold depends on your age and filing status. For most people under 65 filing as single, the threshold is around $1,300 per year (this amount changes annually). If you are married filing jointly and under 65, it is higher. If you are 65 or older, the threshold is slightly higher still.

Your bank is required to send you a Form 1099-INT if you earned $10 or more in interest during the year. However, you may owe tax on interest below $10 even if you do not receive a 1099-INT. The $10 threshold is what triggers the bank to mail the form—not what triggers your tax obligation. If you earned $5 in interest and your total income puts you over the filing threshold, you still report it.

If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add up all the interest from all the forms and report the total on your return. If you earned interest at a bank that did not send a form (because it was under $10), you still include it in your total.

How interest rates affect what you owe in taxes

Higher interest rates mean more interest income, which means a larger tax bill. If your savings account earned 0.01% interest five years ago, you might have earned almost nothing. Today, with rates around 4% to 5% at many banks, the same $10,000 balance generates $400 to $500 per year in taxable interest.

This matters because it changes whether you cross the reporting threshold and how much tax you actually owe. Someone with $50,000 in savings earning 4.5% interest earns about $2,250 per year—all of which is taxable. At a 22% federal tax rate, that is roughly $495 in federal tax owed. At a 24% rate, it is about $540. State tax would be on top of that.

The higher your interest rate, the more you benefit from putting money in high-yield savings accounts—but also the more tax you will owe. This is not a reason to avoid high-yield accounts; the after-tax return is still better than a low-rate account. It is just a reason to plan for the tax bill when it comes.

Certificates of Deposit (CDs) and other savings products

Interest from Certificates of Deposit (CDs) is taxed the same way as savings account interest. You report it on Form 1099-INT, and it counts as ordinary income. The bank sends the form in January for interest earned during the previous year, even if the CD has not matured yet.

If you withdraw money from a CD before it matures, you typically pay an early withdrawal penalty. That penalty is not tax-deductible, but it does reduce the amount of interest you actually receive. For tax purposes, you report the interest you earned, not the interest minus the penalty. The penalty is a separate cost you bear.

Money Market Accounts work the same way. Interest is taxable and reported on Form 1099-INT. Some banks offer "no-penalty CDs" that let you withdraw early without a penalty—these still generate taxable interest reported the same way.

Tax-advantaged alternatives to regular savings accounts

If you want to save money and reduce your tax burden, certain accounts let you defer or avoid taxes on interest. A traditional IRA or 401(k) lets you contribute money that may be tax-deductible, and the interest inside the account grows tax-free until you withdraw it in retirement. A Roth IRA lets you contribute after-tax money, but the interest grows completely tax-free and you owe no tax when you withdraw it.

These accounts have contribution limits and rules about when you can withdraw without penalty. A traditional IRA has a contribution limit of $7,000 per year (or $8,000 if you are 50 or older). A Roth IRA has the same limit but also has income limits—if you earn too much, you cannot contribute. A 401(k) through an employer has a much higher limit, around $23,500 per year.

For money you need to access before retirement, a regular savings account is still the right choice, even though the interest is taxable. The tax on interest is a small price for having your money available when you need it. For money you will not touch for years, a retirement account can save you significant tax.

What happens if you do not report interest income

The IRS receives a copy of every Form 1099-INT that your bank sends you. If you do not report the interest on your tax return, the IRS will notice the mismatch. They may send you a notice asking you to file an amended return or pay the tax you owe, plus penalties and interest on the unpaid amount.

The penalty for not reporting income is usually 20% of the unpaid tax. If the IRS determines the failure was fraudulent (meaning intentional), the penalty can be as high as 75%. Interest accrues on the unpaid tax from the original due date until you pay. For someone who owed $500 in tax and did not report it, the total bill could easily exceed $700 or $800 by the time penalties and interest are added.

If you made an honest mistake and report the interest when you discover it, the IRS is usually willing to work with you. Filing an amended return (Form 1040-X) shows good faith. If you owe a small amount, the IRS may waive penalties if you have a clean record. The key is to report it rather than ignore it.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

If you earned less than $10, your bank will not send a Form 1099-INT. However, you still report the interest on your tax return if your total income is above the filing threshold for your age and status. The $10 threshold only determines whether the bank mails the form, not whether you owe tax.

What if I have interest from a bank that closed or went out of business?

If a bank failed and was taken over by another bank, the new bank will send you a 1099-INT for any interest earned before the takeover. If you never received a form, contact the FDIC or the acquiring bank to request one. You still report the interest even if you do not have the form in hand.

Can I deduct losses from a savings account on my taxes?

No. Savings accounts do not generate losses for tax purposes. The interest you earn is income. If your account earns no interest or very little, you simply report that amount—which may be zero. You cannot deduct the opportunity cost of keeping money in a low-rate account.

Is interest from a joint savings account split between owners for tax purposes?

The bank reports all interest on a single Form 1099-INT. How you split the tax responsibility between joint owners is a matter between you and the other owner—the IRS does not automatically split it. If you and a spouse own a joint account, you may report it all on one return or split it, depending on your situation. Consult a tax professional if you are unsure.

What if I moved to a different state during the year?

You report interest income to both states if you lived in each for part of the year. Some states offer a credit for taxes paid to another state to avoid double taxation. File a part-year resident return in each state and report the interest according to that state's rules. Your tax software or a tax professional can help you navigate this.