Yes, you owe federal income tax on savings account interest

The interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or salary — you must report it on your federal tax return, and you may owe income tax on it. Most banks send you a Form 1099-INT each January showing how much interest you earned the previous year. If you earned $10 in interest, you report $10. If you earned $1,500, you report $1,500.

The tax you owe depends on your overall income and tax bracket. Someone in the 22% tax bracket owes roughly 22 cents per dollar of interest. Someone in the 12% bracket owes roughly 12 cents. If your total income is very low, you may owe no federal tax at all, even on the interest.

Many states also tax savings account interest as part of your state income tax. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not have a state income tax at all, so you would owe nothing to the state. Others tax it at rates ranging from roughly 1% to 13%, depending on where you live and your income level.

Key Takeaways

  • The IRS requires you to report all savings account interest on your federal tax return, regardless of the amount.
  • Your bank will send you a Form 1099-INT by January 31 showing the interest you earned in the previous year.
  • The federal tax you owe on interest depends on your tax bracket, which is determined by your total income.
  • Most states tax savings account interest as part of state income tax, but eight states have no state income tax at all.
  • You do not owe tax on the principal (the money you deposited), only on the interest the bank paid you.

When your bank sends you Form 1099-INT

Your bank is required to send you a Form 1099-INT by January 31 if you earned $10 or more in interest during the previous calendar year. The form shows the account number, the amount of interest paid, and sometimes other details like U.S. savings bond interest or dividend income.

You receive one copy in the mail and the bank sends a copy to the IRS. When you file your tax return, you report the interest amount from the 1099-INT on your return. If you earned interest from multiple banks or accounts, you will receive multiple 1099-INT forms — one from each institution.

If you did not receive a 1099-INT by early February but you know you earned interest, contact your bank. They may have sent it to an old address, or they may have made an error. You can request a replacement copy. You are still responsible for reporting the interest even if you do not receive the form.

How the tax is calculated based on your income level

Federal income tax on interest works through the tax bracket system. Your tax bracket is determined by your total income — wages, self-employment income, interest, dividends, and other sources added together. The more income you have, the higher your bracket and the higher the percentage of tax you owe.

For 2024, federal tax brackets for single filers range from 10% (for income up to roughly $11,600) to 37% (for income over roughly $578,000). If your total income puts you in the 22% bracket, you owe roughly 22% on the interest. If you are in the 10% bracket, you owe roughly 10%.

However, if your total income is below the standard deduction for your filing status, you may owe no federal tax at all. The standard deduction for a single person in 2024 is $14,600. If you earned $500 in interest and had no other income, your total income is $500, which is below the standard deduction, so you would owe no federal tax. The IRS still wants to see the 1099-INT reported on your return, but your tax liability would be zero.

State income tax on savings interest

Most states tax savings account interest as ordinary income, using their own tax brackets and rates. Your state tax rate depends on where you live and your income level. Some states have rates as low as 1%; others go as high as 13%. A few states tax interest differently than wages — for example, some offer a small deduction or exemption for interest income.

Eight states have no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe no state tax on your savings interest, though you still owe federal tax.

If you live in a state with income tax but moved during the year, you may owe tax to two states. Contact your state tax authority or a tax professional if you changed residency mid-year.

The difference between interest and principal

You do not pay tax on the money you put into the savings account — only on the interest the bank pays you. If you deposit $5,000 and earn $50 in interest, you owe tax only on the $50. The $5,000 is your principal and is not taxable income.

This matters when you withdraw money. If you withdraw $5,000 plus the $50 in interest, you have taken out $5,050 total, but only the $50 is subject to tax. Withdrawing money from a savings account does not trigger any tax event — you already paid tax on the interest when you reported it on your return.

What to do if you earned very little interest

If you earned less than $10 in interest, your bank is not required to send you a Form 1099-INT. However, you are still required to report the interest on your tax return if you file one. Keep your bank statements or year-end summary showing the interest amount.

If you earned $10 or more, you will receive the form and should report the amount shown on it. Do not estimate or round — use the exact figure from the 1099-INT.

Frequently Asked Questions

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

Your bank does not have to send you a Form 1099-INT if you earned less than $10, but you are still required to report the interest on your tax return if you file one. Use your bank statements to find the exact amount.

What if my savings account earned interest in two different states?

You report all interest on your federal return. For state taxes, you typically report interest to the state where you lived when you earned it. If you moved mid-year, you may owe tax to both states. Contact your state tax authority for guidance on how to split the income.

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

No. You report the full interest amount shown on the 1099-INT. Savings account fees are not deductible against interest income on your federal return, though some states allow limited deductions for investment-related fees.

Do I owe tax on interest I did not withdraw?

Yes. You owe tax on interest in the year it is earned, whether you withdraw it or leave it in the account. The IRS taxes interest on an accrual basis, not when you actually take the money out.

What if the 1099-INT shows the wrong amount?

Contact your bank immediately. They can issue a corrected form (Form 1099-INT with a "CORRECTED" box marked). You will receive the corrected version and the IRS will receive one too. Report the corrected amount on your tax return.