Savings account interest is taxed as ordinary income at your federal tax rate, plus any state and local income tax that applies where you live

The interest your bank pays you on a savings account is not a special category. The IRS treats it the same way it treats wages or salary — as ordinary income. That means you pay federal income tax on it at whatever rate bracket you fall into, which ranges from 10% to 37% depending on your total income for the year. If your state has an income tax, you pay that too. If your city taxes income, you pay that as well.

The bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. This form lists exactly how much interest you earned. You report that amount on your tax return, and the IRS calculates the tax you owe based on your overall income and filing status.

The amount of tax you actually owe depends entirely on your tax bracket, not on the bank or the account type. A person in the 22% federal bracket pays 22% tax on savings interest. A person in the 12% bracket pays 12%. This is different from capital gains or may have access to dividends, which have their own lower tax rates — savings interest does not get that treatment.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax rate, which ranges from 10% to 37% depending on your total income.
  • You also pay state and local income tax on savings interest if those taxes apply where you live.
  • Banks report interest earnings of $10 or more on Form 1099-INT, which you receive in January and report on your tax return.
  • The tax you owe is calculated when you file your return based on your total income for the year, not when you earn the interest.
  • High-yield savings accounts earn more interest but are taxed the same way as regular savings accounts.

When the bank reports your interest to the IRS

Your bank tracks every deposit of interest into your account throughout the year. If the total reaches $10 or more by December 31, the bank is required to file Form 1099-INT with the IRS and send you a copy. You should receive your copy by January 31 of the following year.

If you earned less than $10 in interest, the bank does not have to send you a form. However, you still owe tax on that interest — you have to report it yourself on your return. Many people with small savings balances or low interest rates fall into this category and do not receive a 1099-INT.

If you have accounts at multiple banks, each bank sends its own 1099-INT. You add up all the interest from all your forms when you report it on your tax return. The IRS receives copies of all these forms, so they know how much interest you earned across all your accounts.

How your tax bracket determines what you pay

Your tax bracket is determined by your total income for the year — wages, self-employment income, investment income, and yes, savings interest. The more income you have, the higher your bracket and the higher percentage you pay on that interest.

For 2024, the federal tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Where you fall depends on your filing status (single, married filing jointly, head of household, etc.) and your total income. If you are single and earned $47,150 in wages plus $500 in savings interest, that $500 is taxed at whatever your marginal rate is — in this case, 22%.

This matters because it means the tax on your savings interest is not fixed. If you have a year with unusually high income, your savings interest gets taxed at a higher rate. If you have a year with lower income, the same amount of interest gets taxed at a lower rate. Some people deliberately time large income events to manage this, though for most people with regular employment, the bracket stays the same year to year.

State and local taxes on savings interest

Forty-one states have an income tax, and most of them tax savings interest the same way the federal government does — as ordinary income at your state rate. State rates range from about 1% to over 13%, depending on the state and your income level within that state.

Some states do not tax interest income at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you pay only federal tax on your savings interest. If you live in a state with income tax, you pay both federal and state tax.

A handful of cities also tax income, including New York City, Philadelphia, and Columbus. If you live in one of these places, you pay federal tax, state tax, and city tax on your savings interest. The total can add up significantly — someone in New York City could pay roughly 37% federal plus 6.5% state plus 3.9% city, though the actual amount depends on income level and deductions.

The difference between savings interest and investment income

Savings account interest is taxed differently from some other types of money you earn. may have access to dividends and long-term capital gains — money you make from selling stocks or mutual funds you have held for more than a year — get preferential tax rates of 0%, 15%, or 20%, depending on your income. Savings interest does not get this break.

This is why some people move money from savings accounts to taxable investment accounts when they have larger sums. The trade-off is that investments carry risk — you can lose money — whereas a savings account does not. For most people, the tax difference is not large enough to justify that risk, especially for emergency funds or money you need to access quickly.

Interest from bonds, bond funds, and CDs is also taxed as ordinary income, just like savings account interest. The only common investments that get preferential rates are stocks held long-term and certain may have access to dividends.

How to report savings interest on your tax return

When you file your federal return, you report the total interest from all your 1099-INT forms on Schedule 1 (Form 1040), line 8. If you use tax software, it usually walks you through entering this information. If you file by hand or with a tax preparer, you add up all your 1099-INT amounts and enter the total.

The interest gets added to your other income, your tax bracket is calculated based on the total, and your tax liability is determined from there. If you have taxes withheld from paychecks or make estimated tax payments, those are credited against what you owe. If you overpaid, you get a refund. If you underpaid, you owe the difference.

For state taxes, you typically report the same interest amount on your state return. Some states have their own forms or schedules, but the process is similar — you enter the interest income and it gets taxed at your state rate.

When you might owe taxes before filing your return

For most people with regular employment, taxes are withheld from paychecks throughout the year, so they do not owe anything when they file — they either get a refund or owe a small amount. Savings interest does not have withholding, so the tax is not paid until you file your return.

If you have a large amount of savings interest and no other income (or very little), you might end up owing a significant amount when you file. This is rare for most people, but it can happen if you have a large savings balance earning high interest rates, or if you received an inheritance or settlement that you put in savings.

If you expect to owe more than $1,000 when you file, the IRS may require you to make estimated tax payments throughout the year to avoid a penalty. This is more common for self-employed people, but it can apply to anyone with income that does not have withholding. Your tax software or preparer can tell you if you need to make these payments.

Frequently Asked Questions

Do I have to pay taxes on savings interest if I earned less than $10?

Yes. The $10 threshold only determines whether the bank sends you a 1099-INT form. You still owe tax on any interest you earned, even if it is $1. You report it yourself on your return. The IRS expects you to report all income, regardless of whether you receive a form.

What if I have savings accounts at multiple banks?

Each bank sends its own 1099-INT if you earned $10 or more at that bank. You add up the interest from all your forms and report the total on your tax return. The IRS receives all the forms and knows your total interest across all accounts.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount on your return. Savings account fees are not deductible for most people. However, if you have investment-related expenses and itemize deductions, some investment fees may be deductible — but regular banking fees are not.

Is the interest taxed when I earn it or when I file my return?

You owe tax on the interest in the year you earn it, even though you do not pay the tax until you file your return the following year. This is why it matters which year the interest posts to your account — interest that posts in December 2024 is taxed in 2024, not 2025.

What if my savings interest pushes me into a higher tax bracket?

Your total income for the year determines your bracket. If savings interest plus your other income crosses a bracket threshold, you pay the higher rate on the income above that threshold, not on all your income. This is how progressive tax brackets work — only the income in each bracket is taxed at that bracket's rate.