Is Savings Account Interest Taxable?

Is savings account interest taxable?

The interest earned on savings accounts is taxable, according to the Internal Revenue Service (IRS). In the United States, interest is treated like any other form of income, and it must be declared when you file your taxes. This is true at the federal level, and some states also levy their own interest-related taxes.

If you have any of the following types of savings accounts, you will likely be taxed, and you must disclose all interest earned:

• Savings accounts
• Checking accounts
• Certificates of deposits (CDs)
• Credit union accounts (interest here may be referred to as “dividends”)
• Savings bonds
• Cash management accounts tied to brokerage firms
• Retirement accounts, such as an IRA (except for tax-advantaged accounts)

Note that there’s a common misconception stating you only have to report interest earned on a savings account if it’s over $10. You must report all interest earned, though you may not be levied a tax for interest totaling under that $10 threshold. This applies even if your bank doesn’t send you a form listing your taxable interest.

How savings account interest is taxed

Your interest income tax rate is the same rate for your other forms of income, such as your work salary or money you make from a side hustle. Ultimately, the total amount of money you make in a calendar year determines your tax rate.

While you don’t pay different tax rates for different types of saving options, you will pay higher overall taxes on high-yield saving accounts simply because your account is generating more income. Higher APY means higher earnings, and you’ll have to pay the IRS accordingly.

To pay taxes on savings account interest, you’ll report it to the IRS using Form 1099-INT. This form will be issued to you by the bank that paid you the interest.

This table shows the federal marginal tax rates for the 2024 tax year (with taxes due April 2025):

So, if you’re a single filer who made $60,000 last year, you’ll be taxed on all income — including your savings account interest — at a rate of 22%. If you and your spouse are filing jointly and made a combined $400,000 last year, you’ll be taxed at a higher rate of 32%.

How much tax-free interest can you earn on savings?

The IRS requires you to report every penny you make, even if you’re self-employed or have income not reported by the issuing employer or other entity.

Banks are only required to send you a Form 1099-INT, which declares interest paid during the relevant calendar year, if they paid you $10 or more in interest the previous tax year. If your bank sends you this form, they’ll also send a copy to the IRS.

Banks aren’t required to send a 1099-INT to you or the IRS if they paid you less than $10 in interest for the year in question. You’re still legally required to report that interest, though. You can enjoy up to $10 of interest tax-free, as long as the income itself is still declared.

When are you not required to pay taxes on savings account interest?

In addition to skipping taxes on annual interest earnings under $10, you may not be taxed on your savings interest if you don’t have any other taxable income.

Because IRAs are tax-deferred, the interest you make on that type of retirement account isn’t taxable until you withdraw your money. The IRS asks you to report income the year you make it, so you would report IRA income when you withdraw it, likely upon retirement, which is also when you’d pay taxes.

How to avoid tax on savings accounts

You can’t completely avoid tax on interest income if you earned that interest via a standard or high-yield savings account (assuming your total is over $10). However, it is possible to avoid paying taxes on other types of savings accounts.

If you’re wondering how to save money and earn tax-free interest, check out these savings options:

• College savings account. If you open a 529 college savings account, you can save for qualified educational expenses without paying taxes on interest earned for the duration. Before you commit to a 529 account, check out the details of the plan in your state as rules can vary depending on your location.
• Health savings account. Similar to a 529, a health savings account (HSA) allows you to save money for medical expenses without paying taxes on any interest the account earns. HSAs are heavily regulated, and you must use the funds for an approved purpose.
• Individual retirement account (IRA). IRAs are not tax-free, but they are tax-deferred. You don’t need to claim earned interest on your taxes until you make a withdrawal from or close out your IRA. Just remember that IRA interest is taxed when the interest and principal are taken out of the account, not when they’re initially earned.
• 401(k). The IRS views employer-sponsored retirement accounts similar to how it views an IRA. You don’t have to pay tax on interest when you earn it but when you make withdrawals, usually upon retirement.
• Roth IRA. The money you add to a Roth IRA is taken after your income is already taxed. Therefore, any interest you earn from your Roth IRA is tax-free — but only if you have the account open for at least five years and reach the age of 59 ½ before you make a withdrawal. If you withdraw funds early, you may have to pay taxes.

How to file taxes for savings account interest

If you’ve earned interest on a savings account that totals at least $10, you should receive a Form 1099-INT from your bank. This document usually comes in January or February of the new year and includes details from the previous year. So, for interest earned in 2024, you should get your 1099-INT in the mail in January or February 2025.

You’ll then use the details from that form to fill out your Form 1040 tax return. If you’ve earned interest over $1,500 — from a single source or as a combined total from multiple accounts — you must itemize to show how much you earned from each account. To do that, head to Schedule B, an attachment dedicated to accurately recording your interest and dividend income.

Remember, you must report all interest received in the corresponding tax year, even if you didn’t receive a 1099-INT.