You pay federal income tax on savings account interest, and possibly state and local tax too

Interest earned in a savings account counts as taxable income. The bank or credit union reports what you earned to the IRS on a Form 1099-INT, and you report it on your tax return. The amount you owe depends on your total income for the year and your tax bracket — there is no separate "savings interest tax", just regular income tax applied to that money.

The tax is owed whether the money stays in the account or you withdraw it. You do not pay tax when you deposit your own money or when you move money between your own accounts — only on the interest the bank pays you for letting them use your money.

Most savings accounts earn so little interest that many people owe nothing on it, either because their total income is below the threshold where federal tax kicks in, or because the interest is small enough that it does not push them into a higher bracket. But you still have to report it if you received a 1099-INT.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your regular tax rate, not as a special category.
  • Your bank sends you a Form 1099-INT by January 31 if you earned $10 or more in interest during the year.
  • You report the interest on your federal tax return, and most states tax it the same way as the federal government does.
  • If you earned interest but did not receive a 1099-INT, you still owe tax on it and must report it yourself.
  • High-yield savings accounts earn more interest, which means a larger tax bill, but the after-tax return is usually still better than traditional savings accounts.

When the bank reports your interest to the IRS

Banks and credit unions file a Form 1099-INT with the IRS for each account holder who earned $10 or more in interest during the calendar year. You receive a copy by January 31, and the IRS receives its copy at the same time. The form shows the account number, the interest amount, and sometimes other details like U.S. savings bond interest or early withdrawal penalties.

If you earned less than $10, the bank does not have to send a 1099-INT, but you still owe tax on that interest if your income is high enough. You report it yourself on your return. If you earned $10 or more and did not receive a form by early February, contact the bank — they may have the wrong address on file, or there may be a delay.

The 1099-INT goes to whichever Social Security number or tax ID is on the account. If you have a joint account, the bank typically reports all the interest to one person's SSN, so you and your spouse may need to split it on your return if you file separately.

How much tax you actually owe on the interest

The tax rate on savings interest is your ordinary income tax rate — the same rate that applies to wages, self-employment income, and most other money you earn. If you are in the 22% federal tax bracket, interest is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%.

Your bracket depends on your total income for the year, not just the interest. If you earned $50,000 in wages and $200 in savings interest, the $200 is added to the $50,000, and your tax bracket is based on the total $50,200. This means high earners pay more tax on the same amount of interest than lower earners do.

Most people with savings accounts earn so little interest that the tax bill is small or zero. A savings account with $10,000 earning 4% per year generates $400 in interest — taxed at your rate, that might be $50 to $100 in federal tax. A high-yield savings account with $100,000 earning 4.5% generates $4,500 in interest, which could mean $1,000 or more in federal tax depending on your bracket.

State and local taxes on savings interest

Most states tax savings account interest the same way the federal government does — as ordinary income at your state tax rate. A few states do not tax interest income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. Illinois and Mississippi do not tax interest and dividend income specifically, even though they tax other income.

If you live in a state that does tax interest, you report it on your state return using the same 1099-INT the bank sent you. Some cities and counties also tax income, including interest, so check your local tax rules if you live in a place with a local income tax.

The state tax rate varies by state and by your income level within that state. New York, California, and a few others have higher top rates than the federal government; others are lower. If you moved during the year, you may owe tax to more than one state, though most states have rules to prevent double taxation.

Interest from CDs, money market accounts, and other savings products

Certificates of deposit (CDs), money market accounts, and savings accounts all report interest the same way — on a 1099-INT. The tax treatment is identical: the interest is ordinary income, taxed at your regular rate.

CDs have one wrinkle: if you withdraw money before the CD matures, the bank charges an early withdrawal penalty. That penalty is also reported on the 1099-INT, and you can deduct it from your taxable interest. So if a CD earned $500 in interest but you withdrew early and paid a $100 penalty, you report $400 of taxable interest.

Money market accounts work like savings accounts — interest is reported and taxed the same way. Treasury bills, Treasury notes, and other U.S. savings bonds are taxed federally but not by most states, which is one reason they are sometimes recommended for high-income earners in high-tax states.

What to do if you did not receive a 1099-INT

If you earned $10 or more in interest and did not receive a 1099-INT by early February, call the bank first. The form may have been mailed to an old address, or the bank may have made an error. Ask them to send a corrected form or to confirm they filed it with the IRS under your correct SSN.

If the bank confirms they sent it but you never got it, ask them to mail a duplicate. If they say you did not earn $10, ask for a statement showing the interest posted to your account — sometimes banks make mistakes in their calculations.

Even if you never receive a 1099-INT, you still owe tax on any interest you earned. The IRS has a copy of the form the bank filed, so if you do not report the interest on your return, the IRS will eventually notice the mismatch. Report the interest yourself using your account statement if you have to, and keep a record of what you reported in case the IRS asks.

High-yield savings accounts and the tax impact

High-yield savings accounts earn more interest than traditional savings accounts — sometimes 4% or higher, compared to 0.01% at many big banks. This means a larger amount of taxable income, but the after-tax return is usually still better than a traditional account.

Example: $50,000 in a traditional savings account earning 0.01% generates $5 in interest and roughly $1 in federal tax (at a 22% rate). The same $50,000 in a high-yield account earning 4.5% generates $2,250 in interest and roughly $495 in federal tax. You keep $1,755 after tax in the high-yield account versus $4 in the traditional account — a huge difference, even after paying the tax.

The tax does not make high-yield accounts a bad choice. It just means you should factor the tax into your planning. If you are in a very high tax bracket, you might also look at Treasury bills or municipal bonds, which have different tax treatment, but for most people a high-yield savings account is still the best place for emergency money.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

The bank does not have to send a 1099-INT, but you still owe tax on the interest if your total income is high enough. Report it on your return using your account statement. If your total income is below the filing threshold for your age and filing status, you may not owe tax even if you report the interest.

What if I have interest in multiple savings accounts?

Each bank sends a separate 1099-INT if you earned $10 or more at that bank. You add up all the interest from all the forms and report the total on your tax return. If one bank earned $8 and another earned $7, neither sends a form, but you still report the $15 total if you owe tax.

Can I deduct savings account interest as a business expense?

No. Interest from a personal savings account is not deductible. If you have a business savings account, the interest is still taxable income to you, not a business expense. Interest you pay on a loan is sometimes deductible, but interest you earn is always taxable.

Does moving money between my own accounts count as income?

No. Transferring money from checking to savings, or from one savings account to another, is not taxable. Only the interest the bank pays you is taxable. Withdrawing money is also not taxable — you are just taking back your own money.

What if my savings account is in a child's name?

The interest is taxable income to the child, and a 1099-INT is sent to the child's SSN. Depending on the child's total income and age, the parent may be able to report it on the parent's return under "kiddie tax" rules, or the child may file their own return. A tax professional can help sort this out.