Savings account interest is taxable income
Yes, you owe federal income tax on the interest your savings account earns. The IRS treats it as ordinary income, taxed at your regular tax rate, not at a lower capital gains rate. If you earned $50 in interest, that $50 counts toward your total taxable income for the year.
Your bank reports this interest to the IRS on a Form 1099-INT, and you report it on your tax return. The amount owed depends on your tax bracket — someone in the 22% bracket pays roughly 22 cents per dollar of interest earned, while someone in the 12% bracket pays roughly 12 cents per dollar.
State and local income taxes also apply to savings interest in most states, though a handful have no income tax at all. The tax is due when you file your federal return, usually by April 15 of the following year.
Key Takeaways
- Banks report savings interest to the IRS on Form 1099-INT if you earned $10 or more in a calendar year.
- You owe federal income tax on all savings interest at your ordinary income tax rate, not a reduced rate.
- Most states also tax savings interest as ordinary income, though nine states have no income tax.
- You report the interest on your tax return; the bank does not send the IRS a separate payment on your behalf.
- Interest earned in 2024 is reported on your 2024 tax return, filed in early 2025.
When the bank sends Form 1099-INT to the IRS
Your bank issues a Form 1099-INT and mails it to you by January 31 following the year the interest was earned. The bank also sends a copy to the IRS. You are required to report this interest on your tax return whether or not you receive the form — the IRS already has a copy.
Banks report interest only if you earned $10 or more during the calendar year. If you earned $8 in interest, the bank does not issue a 1099-INT, but you still owe tax on that $8 if your total income exceeds the threshold for your filing status. The threshold varies by age and filing status — for example, a single person under 65 with no other income does not owe federal tax unless income exceeds $14,600 in 2024, but the exact number changes each year.
If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add all the interest together when you report it on your return.
How to report interest on your tax return
You report savings interest on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest and dividends combined. If you have $1,500 or less, you can report the total directly on Form 1040 without filing Schedule B.
The process is straightforward: write the name and address of each bank, the amount of interest from each 1099-INT, and add them together. That total goes on your return. You do not need to attach the 1099-INT forms themselves — the IRS already has copies from the banks.
If you file electronically, tax software walks you through this step and pulls the information from the 1099-INT you enter. If you file by paper, you fill in the Schedule B by hand and mail it with your return.
The difference between federal and state taxes on interest
Federal tax is owed by everyone with taxable income, but state tax depends on where you live. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes interest and dividends but not wages). If you live in one of these states, you owe federal tax on savings interest but no state tax.
In the other 41 states and Washington D.C., savings interest is taxed as ordinary income at your state rate. Some states have a flat rate — Colorado taxes all income at 4.4%, for example — while others use brackets like the federal system. A few states offer small deductions for interest income, but most do not.
If you live in a state with income tax and move to a state without it, or vice versa, the tax treatment of your interest changes. Interest earned before you move is taxed by the state where you lived when you earned it, not where you live when you file.
What happens if you do not report interest income
The IRS receives a copy of every 1099-INT your bank sends. If you do not report the interest on your return, the IRS will notice the discrepancy and send you a notice. This can trigger an audit, a bill for back taxes, and penalties.
The penalty for not reporting income is usually 20% of the unpaid tax, plus interest on the unpaid amount going back to the original due date. If the IRS determines the underreporting was intentional, the penalty can be as high as 75%. Even small amounts of unreported interest can trigger correspondence from the IRS.
If you realize you missed reporting interest in a prior year, you can file an amended return using Form 1040-X for that year. Filing an amended return voluntarily before the IRS contacts you is much better than waiting for them to find the error.
High-yield savings accounts and interest tax
High-yield savings accounts earn more interest than traditional savings accounts — sometimes 4% to 5% annually compared to 0.01% at a traditional bank. But the tax treatment is identical: all interest is taxable income, reported on Form 1099-INT, and taxed at your ordinary income rate.
If you earn $2,000 in interest from a high-yield account, you owe tax on the full $2,000. The higher rate makes these accounts more attractive for saving, but it also means larger tax bills. Some people use high-yield savings accounts for short-term goals and tax-advantaged accounts like Roth IRAs for longer-term saving specifically to avoid this tax.
The bank reports the interest the same way regardless of the rate: on Form 1099-INT by January 31, with a copy to the IRS.
Tax-advantaged alternatives to regular savings accounts
If you want to save money without paying tax on the interest, Roth IRAs and Roth 401(k)s allow you to earn interest tax-free. Money you contribute grows without taxation, and you can withdraw it tax-free in retirement. The tradeoff is that you cannot touch the money before age 59½ without a penalty, and there are annual contribution limits.
Traditional IRAs and 401(k)s defer the tax rather than eliminating it — you do not pay tax on the interest while the money is in the account, but you pay tax on withdrawals in retirement. These are useful if you expect to be in a lower tax bracket later.
Certificates of Deposit (CDs) also earn interest that is fully taxable, reported on Form 1099-INT just like savings accounts. The tax advantage of a CD is that you lock in a rate, not that the interest is taxed differently.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
The bank does not send a 1099-INT for interest under $10, but you still owe tax on it if your total income exceeds the filing threshold for your situation. The filing threshold depends on your age and filing status — for a single person under 65 with no other income, it was $14,600 in 2024. Check the IRS website for the current year's threshold.
What if I earned interest in multiple accounts at the same bank?
The bank combines all interest from all your accounts at that institution on a single 1099-INT. If you have accounts at multiple banks, each bank sends its own form. You add all the interest together on your tax return.
Can I deduct the taxes I pay on savings interest?
No. Interest income is taxable, and you cannot deduct the tax you owe on it. You report the gross interest earned, not the amount after taxes. The tax is calculated based on your total income and tax bracket.
Do I owe tax on interest if I did not withdraw the money?
Yes. You owe tax on interest in the year it is earned, whether or not you withdraw it from the account. The IRS taxes the interest when the bank credits it to your account, not when you move the money.
What if my bank did not send a 1099-INT but I earned interest?
Report the interest anyway. You can find the amount on your account statements or by contacting the bank. The IRS has a copy of the 1099-INT from the bank, so not reporting it will trigger a notice. If the bank made an error and did not send the form when it should have, contact the bank to request a corrected form.