Yes, you pay federal income tax on savings account interest
Interest earned in a savings account is taxable income. The bank reports it to the IRS on a 1099-INT form, and you report it on your tax return. The amount you owe depends on your tax bracket — the same way it does for wages or other income.
The tax applies to all savings accounts: regular savings, money market accounts, high-yield savings accounts, and certificates of deposit (CDs). It does not matter whether the bank is online or brick-and-mortar. If the account earns interest, that interest is taxable.
Some states also tax savings interest, though the rules vary. A few states exempt interest income entirely; most tax it at the same rate as federal income. You will need to check your state's rules when you file your state return.
Key Takeaways
- Banks report savings interest to the IRS on Form 1099-INT, and you must report it as income on your federal tax return.
- The tax you owe on interest depends on your overall income and tax bracket, not on the size of the account.
- Interest is taxed as ordinary income, which means it is taxed at your regular income tax rate, not at a lower capital gains rate.
- Most states tax savings interest, but a handful do not — check your state's rules when filing your state return.
- You do not owe tax on the principal (the money you deposited), only on the interest the bank pays you.
When the bank sends you a 1099-INT form
Banks mail or deliver a 1099-INT to you by January 31 each year. This form lists all the interest you earned in that account during the previous calendar year. The bank also sends a copy to the IRS.
You will receive a 1099-INT if your account earned $10 or more in interest during the year. Some banks send one even if you earned less, but you are not required to receive one to report the income — if you earned any interest at all, you should report it.
If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. When you file your tax return, you add up all the interest from all the forms and report the total.
How much tax you owe on savings interest
The amount of tax depends on your tax bracket. If you are in the 22% tax bracket, you owe roughly 22% of the interest as federal income tax. If you are in the 12% bracket, you owe roughly 12%. The interest is added to your other income, and your total income determines which bracket you fall into.
This is different from long-term capital gains, which are taxed at lower rates (0%, 15%, or 20% depending on income). Savings interest is taxed as ordinary income, the same as wages or self-employment income.
Example: You earn $50,000 in wages and $500 in savings interest. Your taxable income is $50,500. The $500 is taxed at your regular income tax rate, not at a special rate for interest.
State taxes on savings interest
Most states tax savings interest as part of your state income tax. The rate varies by state — some states tax it at the same rate as federal income, others at a different rate. A handful of states do not tax interest income at all.
States that do not tax interest income include: Illinois, Mississippi, and Tennessee. Some other states offer partial exemptions for certain types of interest or for people over a certain age. Check your state's tax authority website or your state tax form instructions to see how interest is treated in your state.
When you file your state return, you will report the same interest income you reported on your federal return. Your state will calculate the tax owed based on your state's tax rate and rules.
What happens if you do not report savings interest
The IRS receives a copy of every 1099-INT the bank sends to you. If you do not report the interest on your tax return, the IRS will notice the discrepancy. This can trigger a notice asking you to explain the difference or pay the tax owed plus penalties and interest.
The penalty for not reporting income is usually 20% of the unpaid tax, plus interest that accrues daily. If the IRS determines the omission was intentional, the penalty can be higher. It is much simpler to report the interest when you file.
Reporting interest on your tax return
On the federal return, interest income goes on Schedule 1 (Form 1040), line 8. You list the total interest from all your 1099-INT forms. If you use tax software, it will usually walk you through entering this information and place it in the correct spot automatically.
If you received a 1099-INT, attach a copy to your return or follow your tax software's instructions for reporting it. Keep your own copy for your records.
On your state return, look for a line for interest income. The exact location varies by state, but most state forms have a section for interest and dividend income. Your state tax instructions will show you where to report it.
Strategies to reduce taxes on savings interest
You cannot avoid the tax on interest, but you can reduce the amount of interest you earn — and therefore the tax you owe — by keeping money in a regular savings account instead of a high-yield account. However, this is not a practical strategy because the tax savings are usually much smaller than the interest you lose.
A more useful approach is to keep money you will need soon in a regular savings account and money you will not touch for years in a high-yield account or CD. The interest you earn on the larger balance will outweigh the tax cost in most cases.
If you have a very large amount of savings, you might also consider other accounts that offer tax advantages, such as a Roth IRA or a 529 college savings plan. These accounts allow interest to grow without triggering annual tax. However, they have contribution limits and withdrawal rules, so they are not a fit for all savings.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
The bank does not have to send you a 1099-INT if you earned less than $10, but you still owe tax on the interest. Report whatever interest you earned, even if it is $1. The IRS expects you to report all income.
What if I have savings in multiple banks?
Each bank sends its own 1099-INT. Add up the interest from all of them and report the total on your tax return. You do not file separate returns for each bank — one total line on your return covers all savings interest.
Is interest from a CD taxed the same way as a savings account?
Yes. CDs are taxed the same as savings accounts — the interest is ordinary income and is reported on a 1099-INT. Some CDs require you to report interest each year even if you do not withdraw it, depending on the term length.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. You cannot subtract fees or other costs. However, some banks waive fees for accounts that meet certain balance requirements, which indirectly reduces your tax burden by letting you keep more interest.
Do I owe self-employment tax on savings interest?
No. Self-employment tax applies only to income from self-employment or business activity. Savings interest is taxed as ordinary income but not as self-employment income, so you do not owe the extra 15.3% self-employment tax on it.