Interest income from your savings account is taxable as ordinary income
The money sitting in your savings account itself is not taxed. But the interest your bank pays you is taxable income, and you report it on your federal tax return every year. The IRS treats savings account interest the same way it treats wages or salary — as ordinary income subject to your regular tax rate.
Your bank will send you a Form 1099-INT each January showing how much interest you earned during the previous year. If you earned $10 or more in interest, the bank must send this form. You then report that amount on your tax return, usually on Schedule 1 (Form 1040) or directly on your 1040 depending on your filing situation.
State and local taxes also apply to savings interest in most places. Some states exempt interest income for certain account types or age groups, but the federal tax is nearly universal.
Key Takeaways
- Interest earned in a savings account counts as taxable income and must be reported on your federal tax return.
- Your bank sends Form 1099-INT if you earned $10 or more in interest during the year.
- High-yield savings accounts earn more interest, which means you owe more tax on those earnings.
- Some account types — like Roth IRAs and certain education savings plans — let interest grow tax-free, though they have contribution limits and withdrawal rules.
- You can reduce taxable interest by moving money to tax-advantaged accounts or by claiming deductions that lower your overall taxable income.
How much tax you pay depends on your total income and tax bracket
Savings interest is taxed at your marginal tax rate — the rate that applies to your highest dollars of income. If you earn $50,000 and your savings account generates $500 in interest, that $500 is taxed at whatever bracket applies to income between $50,000 and $50,500.
For 2024, federal tax brackets range from 10% to 37% depending on your filing status and total income. A person in the 22% bracket pays 22 cents in federal tax on every dollar of savings interest. Someone in the 37% bracket pays 37 cents on the dollar. State income tax, where it exists, stacks on top of the federal rate.
This is why high-yield savings accounts can create a tax surprise. If your regular savings account earned $20 in interest, you barely noticed the tax. But a high-yield account earning $800 or $1,200 per year means you owe real money in April — money that comes from your own pocket, not from the interest itself.
Tax-advantaged accounts let interest grow without annual tax bills
A Roth IRA lets you contribute up to $7,000 per year (or $8,000 if you are 50 or older in 2024), and all interest and growth inside the account is tax-free forever. You never report the interest on your tax return. The catch: you cannot withdraw the money before age 59½ without penalties, and you must have earned income to contribute.
A 529 education savings plan works similarly for college or may have access to education expenses. Interest grows tax-free, and withdrawals for tuition, room and board, books, and certain other education costs are not taxed. If you withdraw money for non-education purposes, you pay tax on the earnings portion plus a 10% penalty.
Health Savings Accounts (HSAs) also offer tax-free growth if you have a high-deductible health plan. You contribute pre-tax money, earn interest tax-free, and withdraw tax-free for medical expenses. After age 65, you can withdraw for any reason (though non-medical withdrawals are taxed like traditional IRA withdrawals).
These accounts have strict rules about who can open them and how much you can contribute, so they are not a fit for everyone. But if you meet the requirements, they can save you hundreds or thousands in taxes over time.
Regular savings accounts in joint names or for minors have their own tax rules
If you own a savings account jointly with a spouse, the interest is split between you for tax purposes — each person reports half on their own return. If you own it with an adult child or unrelated person, you each report the interest based on your ownership percentage.
A savings account opened for a minor child (under age 18 or 19, depending on state) generates interest that the child must report. For 2024, a child with less than $1,450 in unearned income (interest, dividends, capital gains) owes no federal tax. Between $1,450 and $2,900, the child pays tax at their own rate. Above $2,900, the "kiddie tax" rule may apply, taxing the excess at the parent's rate instead.
This means you can move some money into a child's savings account to earn interest at their lower tax rate — a strategy called income shifting. But the kiddie tax rule limits how much you actually save, and the account must be in the child's name with their Social Security number.
Reporting interest on your tax return
When you file your federal return, you report savings interest on Schedule 1 (Form 1040), line 8b if you are using the standard form. If you use tax software, it usually asks you to enter the amount from your 1099-INT forms, and the software places it in the right spot.
If you earned interest from multiple banks or accounts, add all the 1099-INT amounts together and report the total. You do not file each form separately — the IRS receives copies directly from the banks.
State tax returns vary by state. Most states that have income tax require you to report the same interest amount on your state return. A few states (like Illinois and Mississippi) exempt interest income for certain taxpayers, but you still need to check your state's specific rules.
If your total interest income is very small — under $600 in most cases — some banks may not send a 1099-INT, but you still owe tax on it. Keep your own records of interest earned so you can report it accurately.
What to do if you did not receive a 1099-INT or it shows the wrong amount
If you earned $10 or more in interest and your bank did not send a 1099-INT by January 31, contact the bank directly. Ask them to issue a corrected form. Do not guess at the amount — use the official form.
If the 1099-INT shows an amount you believe is wrong, first check your account statements to verify the interest posted. Banks make mistakes occasionally. If you find an error, call the bank and ask them to issue a corrected 1099-INT (marked as a correction) before you file your return.
If you already filed your return and later discover the bank reported the wrong amount, you can file an amended return using Form 1040-X. The IRS will also receive the corrected 1099-INT from the bank, so filing the amendment protects you from a mismatch notice later.
Frequently Asked Questions
Do I have to pay taxes on interest if I do not withdraw the money?
Yes. The IRS taxes interest in the year it is earned, even if you leave it in the account. The bank adds the interest to your balance, and you owe tax on it that year. This is called "accrual basis" taxation — you owe tax when the interest is credited, not when you spend it.
What if my savings account earned less than $10 in interest?
Your bank may not send a 1099-INT if interest is under $10, but you still owe tax on it. Keep your own records and report the amount on your return. The IRS can see your account activity, so reporting it protects you.
Can I deduct savings account fees from the interest I report?
No. You report the gross interest your bank paid you. Fees you paid to the bank are not deductible against that interest. However, if you paid investment advisory fees or tax preparation fees related to your savings, those may be deductible in limited situations — check with a tax professional.
Is interest from a money market account taxed the same way as a savings account?
Yes. Money market accounts are treated identically to savings accounts for tax purposes. The bank sends a 1099-INT, and you report the interest as ordinary income on your federal and state returns.
What if I moved money between banks during the year — do I report interest from both?
Yes. You report all interest earned from all accounts during the tax year, regardless of when you opened or closed them. Each bank sends a 1099-INT for the interest it paid, and you add them all together on your return.