How Are Savings Accounts Taxed? What You Owe on Interest
Savings accounts are taxed as ordinary income on the interest you earn each year, reported on Form 1099-INT if you earn $10 or more. The interest becomes taxable in the year it is credited to your account, regardless of whether you withdraw it, and is added to your other income when calculating your total federal tax liability at your marginal rate.
How Savings Account Interest Is Taxed at the Federal Level
Savings account interest is taxed as ordinary income at your marginal federal tax rate, which ranges from 10% to 37% depending on your total taxable income and filing status. The IRS treats interest income the same as wages or salary, not as capital gains.
The tax applies to interest credited to your account during the tax year, not just withdrawals. If your savings account earned $150 in interest in 2024 and you never touched the money, you still owe tax on that $150.
Do You Pay State Taxes on Savings Account Interest?
Most states tax savings account interest as ordinary income, following the same treatment as the federal government. Forty-one states and the District of Columbia impose a state income tax, and in these jurisdictions your interest income typically flows through from your federal return to your state return.
Nine states have no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you avoid state tax on your interest but still owe federal tax.
When Do You Receive Form 1099-INT and What Does It Show?
Banks and financial institutions mail Form 1099-INT by January 31 for the prior tax year if you earned $10 or more in interest. This form reports the total interest credited to all your accounts at that institution during the calendar year.
If you have accounts at multiple banks, you will receive a separate 1099-INT from each institution. You must add up all interest from every source when preparing your return.
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How Much Will You Owe on Your Savings Account Interest?
The amount you owe depends on your marginal tax bracket and total interest earned. For 2024, federal marginal rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
State tax adds to the bill. In a state with a 5% flat rate, that $500 of interest costs an additional $25.
Are There Ways to Reduce Taxes on Savings Account Interest?
Standard savings accounts offer no tax deferral or deduction, but alternative savings vehicles provide tax advantages. Health Savings Accounts (HSAs) allow tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses, effectively eliminating tax on interest if used correctly.
For education savings, 529 plans offer tax-free growth and withdrawals when funds pay for qualified education expenses. Contributions are not federally deductible, but many states provide a state income tax deduction or credit.
None of these options replicate the full liquidity of a standard savings account. If you need immediate access to cash, a taxable savings account remains appropriate despite the annual tax on interest.
FAQ
Do you pay taxes on savings account interest if you don't withdraw the money?
Yes. The IRS taxes interest in the year it is credited to your account, whether or not you withdraw it.
How much savings account interest is tax-free?
No amount of savings account interest is automatically tax-free at the federal level. Even $1 in interest is technically taxable, though banks only issue a 1099-INT if you earn $10 or more.
Can you deduct bank fees or account maintenance charges against interest income?
No. The Tax Cuts and Jobs Act eliminated the miscellaneous itemized deduction for investment expenses, including bank fees, for tax years 2018 through 2025.
Is interest from an online high-yield savings account taxed differently?
No. Online high-yield savings accounts and traditional brick-and-mortar savings accounts receive identical tax treatment.
Do joint savings accounts split the tax burden between account holders?
The 1099-INT is issued to the primary account holder whose Social Security number is listed first. That person reports the full interest on their tax return.
How do I report savings account interest if I didn't receive a 1099-INT?
Report the interest on Schedule B (if over $1,500 total interest and dividends) or Line 2b of Form 1040 (if under that threshold). Use your December account statement to find the year-to-date interest total.
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How the interest calculator estimates compound growth
Compound interest applies each period’s rate to the starting balance plus previously credited interest. This interest computation differs from simple interest, which calculates interest only on the original principal. A daily compound interest calculator uses more compounding periods than a monthly or annual model, although the practical difference depends on the stated rate, account terms, and length of time.
Enter a starting amount, recurring contribution, assumed return, compounding frequency, and time horizon. The resulting future value calculator estimate is not a guarantee, particularly when modeling an investment with changing returns. For deposit accounts such as high yield savings, compare the annual percentage yield rather than relying only on the stated interest rate. The rule of 72 can provide a rough mental estimate, but a calculator offers more detail.
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