You pay federal income tax on the interest your savings account earns, but not on the money you deposit
The deposits you put into a savings account are not taxable — that is money you already earned and paid taxes on. The interest the bank pays you on that balance, however, counts as income and must be reported to the IRS. The amount varies by account type and how much interest the bank actually pays, but any interest above zero triggers a tax obligation.
Your bank will send you a Form 1099-INT (Interest Income) if you earned $10 or more in interest during the year. Even if you earn less than $10, you still owe tax on it — the form just is not required. You report this interest on your federal tax return, and it gets added to your other income for the year.
State income tax works the same way in most states. If your state has an income tax, you will owe tax on savings interest there too. A handful of states — including Pennsylvania, Illinois, and Mississippi — do not tax interest income at all, so check your state's rules if you live in one of those.
Key Takeaways
- Your bank sends Form 1099-INT if you earn $10 or more in interest during the year, and you report that interest as income on your tax return.
- Interest earned on savings accounts is taxable at both federal and state levels in most places, even if the amount is small.
- High-yield savings accounts earn more interest than traditional savings accounts, which means a larger tax bill on that interest.
- You can reduce your tax burden by keeping money in accounts that earn little or no interest, or by using tax-advantaged accounts like Roth IRAs or 529 plans for savings goals.
How the IRS knows about your savings interest
Banks report interest to the IRS automatically through Form 1099-INT. Your bank prepares this form and sends copies to both you and the IRS by January 31 each year. The IRS then matches what your bank reported against what you put on your tax return — if the numbers do not match, you may receive a notice.
This reporting happens whether you think the interest is significant or not. A savings account earning 0.01% interest still generates a 1099-INT if the total hits $10. A high-yield savings account earning 4% or 5% will generate a much larger form and a much larger tax bill.
If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add all the interest together when you file your return. If you moved money between accounts during the year or closed an account, the interest is still reported by the bank that held the money when it was earned.
The difference between high-yield and traditional savings accounts
A traditional savings account at a big bank typically earns 0.01% to 0.05% annual interest. A high-yield savings account at an online bank or credit union often earns 4% to 5% or higher. The difference in what you owe in taxes is substantial.
On a $10,000 balance, a traditional account earning 0.01% generates $1 in interest and no tax form. The same $10,000 in a high-yield account earning 4.5% generates $450 in interest — taxable as ordinary income. If you are in the 22% federal tax bracket, that $450 costs you roughly $99 in federal tax alone, plus state tax if applicable.
This does not mean high-yield accounts are a bad choice — the interest you earn still exceeds what you pay in tax. But it does mean you should factor the tax cost into your decision about where to keep your money, especially if you have a large balance.
Tax-advantaged accounts that shelter savings from interest tax
If you want to save money without paying tax on the interest, certain account types let you do that. A Roth IRA lets you save up to $7,000 per year (or $8,000 if you are 50 or older) and earn interest tax-free, as long as you do not withdraw the money before age 59½. A 529 college savings plan works the same way for education expenses — interest grows tax-free if you use the money for tuition, room and board, or other school costs.
A Health Savings Account (HSA) also shelters interest from tax if you have a high-deductible health plan. You can contribute up to $4,150 per year (or $8,300 for family coverage) and the interest is never taxed as long as you spend the money on medical expenses.
These accounts have rules about when you can withdraw money and what you can use it for, so they work best if you have a specific savings goal — retirement, education, or medical costs — rather than a general emergency fund. For money you need to access anytime, a regular savings account is more practical, even though you will owe tax on the interest.
What to do when you receive Form 1099-INT
Your bank will mail Form 1099-INT by January 31. Check it for accuracy — confirm that the interest amount matches what you saw in your account statements. If the amount is wrong, contact your bank and ask them to issue a corrected form (called a 1099-INT with a corrected indicator).
When you file your tax return, report the interest on Schedule 1 (Form 1040), line 8b. If you use tax software, it will walk you through entering this information. If you file by hand or with a tax preparer, give them the 1099-INT form or tell them the interest amount.
Keep your 1099-INT forms for at least three years in case the IRS asks questions. You do not send the form with your return — the IRS already has a copy from your bank — but you need it to verify what you reported.
Interest from money market accounts and certificates of deposit
Money market accounts and certificates of deposit (CDs) work the same way as savings accounts for tax purposes. Any interest you earn is reported on Form 1099-INT and is taxable. A CD that matures before the end of the year generates a 1099-INT for that year. If a CD matures in the following year, the interest is reported then.
If you withdraw money from a CD before it matures, you usually pay an early withdrawal penalty. That penalty does not reduce your taxable interest — you still owe tax on the full amount the bank paid you. The penalty is deductible on your tax return, but it does not offset the interest tax dollar-for-dollar.
Some banks offer CDs with promotional rates that are much higher than normal. These still generate 1099-INT forms and are still taxable. The higher the rate, the larger your tax bill, so factor that into your decision about whether the rate is worth it.
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 your bank sends you a Form 1099-INT. You still owe tax on any interest you earned, even $1 or $5. You report it on your tax return, and the IRS expects it to match what your bank reported.
What if I earned interest but did not receive a 1099-INT form?
Contact your bank and ask them to send one. If you earned $10 or more, they are required to issue it by January 31. If you earned less than $10, they are not required to send a form, but you still report the interest on your return based on your account statements.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. Savings account fees are not deductible. However, if your bank charged you fees that exceeded the interest you earned, you can report a net loss, which may reduce your overall taxable income.
Do I pay taxes on interest if the money is in a joint account?
Yes, and the tax responsibility depends on who owns the account. If you and another person own the account jointly, you each report your share of the interest. Your bank will issue one 1099-INT, so you and the other owner need to divide the interest and each report your portion on your own tax return.
Is savings account interest taxed differently if I am retired?
No. Interest is taxed the same way regardless of your age or employment status. However, if you are over 65, you may be able to claim an additional standard deduction on your tax return, which could reduce the tax you owe on the interest and your other income combined.