When you put your hard-earned money into a savings account, you probably expect it to grow over time. But does savings account interest get taxed? In a word, yes. The IRS considers the interest you earn to be taxable income, just like the money you make from working. That means you have to pay taxes on it, which can change your whole financial picture, especially if you’re saving for a big goal like a home, a child’s education, or retirement.
This blog will explain everything you need to know about taxes on the interest you earn on your savings account. From how your interest income is taxed to what exceptions may apply and how to report it on your tax return – you will learn about it all.
Key Takeaways:
- Savings account interest is taxable and must be reported on your tax return.
- Interest earned from savings in bank accounts is taxed by the IRS as regular income.
- Some states don’t tax the interest on savings accounts. Others have low income tax rates.
A Simple Explanation of Savings Account Interest
When you put money into a savings account, the bank pays you a small amount of interest on that money. This is basically the bank’s way of paying you for letting them use your money to make loans and other investments. But there’s a catch: this interest is taxable.
Let’s go over the main points:
- Principal deposits: The first money you put into your savings account is not subject to taxes. You still own it, and you don’t have to pay taxes on it.
- Interest earned: The IRS sees the interest you make on your savings account as taxable income. You have to report this income on your taxes, even if your bank doesn’t send you a Form 1099-INT.
- Interest credited when available: Interest that is credited to your account throughout the year is taxable in the year it is earned, not when it is taken out. This means that if you make money in 2026, you have to report it on your 2026 tax return.
How the IRS Taxes Interest on Savings Accounts
The IRS sees the interest you make on your regular savings account as income and taxes it as such. It may seem hard at first, but once you know how it works, it’s not too hard. This is what you need to know:
Rules for Federal Taxes
Interest is included in your gross income
The IRS understands the interest you earn on a savings account as regular income, just like your pay or salary. This means that you have to pay federal income tax on it at your normal tax rate.
It is taxed as regular income, not as capital gains
Interest on savings accounts is not taxed as capital gains like stocks and bonds are. Instead, it is taxed at the same rate as the other income that you have to pay taxes on.
What Forms You Will Receive
Form 1099-INT is for people who earn at least $10 in interest
Your bank must send you Form 1099-INT if you earn $10 or more in interest during the tax year. This form will tell you how much interest you made.
Filing Your Tax Return
“Taxable Interest” is line 2b on Form 1040
On Line 2b of your Form 1040, in the section for taxable interest, you will write down the interest you earned on your savings account.
When you need to fill out Schedule B:
If you make more than $1,500 in interest, you will need to file Schedule B to report the interest from all of your accounts. Schedule B makes sure that you report interest income from more than one source correctly.
This process makes sure that you are correctly reporting all of the taxable interest you have earned on your savings. Knowing how the forms work will also make it easier to file your federal tax return.
Does Savings Account Interest Get Taxed By States?
The federal government taxes interest on savings accounts, but depending on where you live, you may also have to pay state income tax. Some states tax interest income the same way the IRS does. Other states don’t, meaning that in these states, if you earn interest on your savings account, you won’t have to pay state taxes on it.
The rules and rates for taxing interest income can vary between states, so it’s important to check your region’s rules. If you live in a state that taxes interest earned from savings accounts, the interest you earn will be added to your taxable income, just like wages.
The following table shows a simple breakdown of how savings account interest is taxed in some common states:
| State | Tax on Savings Interest? |
|---|---|
| Ohio | Yes |
| California | Yes |
| Florida | No |
| Texas | No |
| New York | Yes |
Make sure to check with your state’s tax laws to determine if you need to pay taxes on your savings account interest beyond the federal level.
Examples & Sample Calculations
Let’s take a closer look at how much tax you might owe on your interest earned on a savings account, based on Ohio’s tax rates. Ohio, like many states, applies income tax on the interest earned, so it’s essential to know how your savings could impact your overall taxable income.
Example 1:
- Interest earned: $5,000
- Tax bracket: 0%
- Tax owed: $0
In this case, if your total income (including interest) keeps you in Ohio’s 0% tax bracket, you wouldn’t owe any state tax on the interest on your savings account. This typically applies to low-income earners who fall within the state’s lowest tax bracket.
Example 2:
- Interest earned: $50,000
- Tax bracket: 3.125%
- Tax owed: $1,562.50
If you earn $50,000 in interest and fall into Ohio’s higher tax bracket, your state tax liability will increase accordingly. At a rate of 3.125%, you’d owe $1,562.50 in state tax on that interest.
| Interest Earned | Tax Bracket | Tax Owed |
|---|---|---|
| $5,000 | 0% | 0% |
| $50,000 | 3.125% | $1,562.50 |
These are simplified examples, and the actual amount you owe will depend on your total taxable income and specific tax bracket. Always check the latest tax guidelines or consult a tax professional for accurate calculations.
Exceptions: When Savings Interest Might Not Be Taxed
Most of the time, the interest you earn on a savings account is taxable. However, there are some cases where you might not have to pay taxes on the interest you earn. Here is a list of those exceptions:
Accounts with Tax Benefits
Some tax-advantaged accounts let you earn interest without having to pay income taxes on it. Some common examples are:
- Health Savings Accounts (HSAs) — If you use the money in an HSA for qualified medical expenses, you don’t have to pay taxes on the interest.
- Roth IRAs — Interest earned in a Roth IRA grows tax-free, and so do withdrawals that meet the requirements.
- 529 Plans — If you use the interest to pay for school-related costs, you won’t have to pay taxes on it.
These accounts let your money grow without the taxes that come with regular savings accounts.
Form 1099-INT Less than $10
Your bank doesn’t have to send you Form 1099-INT if you make less than $10 in interest on your savings account. You still have to report this interest income on your tax return, though. No matter how small the amount, the IRS expects you to report all of your interest on your tax return.
Tax-Exempt Bonds
Some bonds, like U.S. savings bonds or municipal bonds, may pay interest that is not taxed. Most of the time, the interest on these bonds isn’t taxed by the federal government. In some cases, it might not even be taxed by the state. But remember that not all bonds are tax-free, and the way they are taxed may be different.
Knowing these exceptions can help you save more money and lower or even avoid paying taxes on interest you earn.
Frequently Asked Questions
Do I owe taxes if I don’t receive a Form 1099‑INT?
Yes, you still must report savings account interest earned, even if you don’t receive a Form 1099‑INT. The IRS requires you to report any interest income you earn, regardless of the amount or whether you receive a form from the bank.
Can savings interest affect my tax bracket?
Yes, additional interest income can push you into a higher tax bracket for your federal income tax return. This is important to consider, especially if you earn significant interest from your savings accounts or other investments.
Is the interest on my money market account taxed the same?
Yes, the interest on your money market account is taxed just like how interest incomes on savings accounts are taxed. It’s considered taxable income and must be reported on your federal tax return.
Can joint account holders split the tax responsibility?
With joint accounts, the interest earned is typically split equally between the account holders for federal tax purposes. Each person reports their portion of the interest income on their tax return, even though the account is jointly held.
What if the bank made a mistake on 1099‑INT?
If the bank makes an error on your Form 1099‑INT, contact them immediately to request a corrected form. If needed, you can also report the interest income directly on your tax return and contact the IRS for further guidance if necessary.
Paying Taxes on Interest From Savings Accounts – Final Thoughts
In conclusion, yes, you do have to pay taxes on the interest you make from your savings account. It’s important to know how this could affect your total taxable income. Make sure to keep an eye on the interest you earn on your savings and plan for the tax impact when you get forms like Form 1099-INT.
Keep in mind that you have to report this interest on your tax return, so it’s important to stay organized and take action. If you’re not sure how interest will affect your taxes, talk to a tax expert for help.
If you need help with your savings strategy, talk to a 1st National Bank advisor today. We’re here to help you make the most of your savings and ensure that you’re managing your taxes effectively.
The material provided on this Website should be used for informational purposes only and in no way should be relied upon for financial advice. Also, note that such material is not updated regularly and some of the information may not, therefore, be current. Please be sure to consult your own financial advisor when making decisions regarding your financial management.
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