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How Tax on Savings Accounts Work

In this article

  1. How to File Taxes on Savings Account Interest
  2. How Is Tax on Interest Income Calculated?
  3. How to Avoid Tax on a Savings Account
  4. FAQs
  5. Final Thoughts

A savings account will help you build a nest egg for the future and better prepare you for unforeseen expenses, but just keep in mind that the interest you earn on a savings account could be taxed.

Katana Dumont • October 23, 2023

If you have a savings account, then you understand the importance of saving money. Opening a savings account is a great way to stay focused on your financial goals, while preparing for the future. But what you may not know is that if your savings account is earning interest, you might owe money to the Internal Revenue Service (IRS).

Any interest earned on either a traditional savings account or a high-yield savings account is considered taxable income by the IRS. This means you must report savings account interest on your tax return each year, regardless if you keep the money in the account, transfer it to another account, or withdraw it. If the IRS discovers you’ve earned interest on a savings account that you didn’t report, you could get hit with fees. 

Learn everything you need to know about how a savings account is taxed, so that you can be better prepared.

How to File Taxes on Savings Account Interest

When you file your annual income tax return, the interest you earn on your savings account(s) is reported on a 1099-INT tax form. If you have earned more than $10 in interest during the tax year, financial institutions are required to send you a 1099-INT form. If you earned less than $10 in interest from any one account, you may not receive a 1099-INT, but you are still required to report the interest to the IRS and pay any taxes due on it. 

How Is Tax on Interest Income Calculated?

Interest from a savings account is taxed at your earned income tax rate for the year. This means that the tax amount you owe on interest for a given year will depend on your total taxable income, the current tax bracket you fall into, and how much you earned in interest.

Here are the marginal tax brackets for the upcoming 2021 income year:


RateSingleMarried Filing JointlyHead of Household
10%Up to $9,950Up to $19,900Up to $14,200
12%$9,951 to $40,525$19,901 to $81,050$14,201 to $54,200
22%$40,526 to $86,375$81,051 to $172,750$54,201 to $86,350
24%$86,376 to $164,925$172,751 to $329,850$86,351 to $164,900
32%$164,926 to $209,425$329,851 to $418,850$164,901 to $209,400
35%$209,426 to $523,600$418,851 to $628,300$209,401 to $523,600
37%$523,601 or more$628,301 or more$523,601 or more

Source: Internal Revenue Service

To illustrate, let’s say as a single individual, your total taxable income in 2021 is $60,000. That puts you in the 22% tax bracket, meaning that in addition to paying 22% on your income, you will also pay 22% of your earned interest in taxes. Say you earned $100 in interest on a savings account that year. If your tax rate is 22%, you’ll owe $22 in taxes from that income.

Keep in mind that the variables that determine your tax bracket can change from year to year. If your normal tax bracket changes, the amount of tax you pay on interest income changes along with it.

What Is Interest Income?
Interest income is generated by savings accounts, CDs, mutual funds, and other investments that pay some form of interest.If you earn interest income on your investments, in most cases, you must pay tax on that income.

How to Avoid Tax on a Savings Account

If you are seeking ways to reduce your tax bill and maximize your savings, there are a few tax-free savings account alternatives you should consider.   

  • Invest your assets in a tax-deferred account(s), such as a traditional IRA or 401(k) to put off paying taxes until you withdraw the money in retirement.
  • Keep your money in a tax-exempt account(s), such as a Roth IRA or a Roth 401(k). These types of accounts are funded with after-tax dollars, meaning you can withdraw tax-free earnings once you reach retirement.
  • Keep assets in an education-oriented account(s), like 529 plans and Coverdell education savings accounts. All earnings in these accounts are tax-free, as long as they’re used for academic expenses.
  • Invest in municipal bonds issued in your state. To encourage investment in local government projects, the interest earned on municipal bonds is free from federal, state (and even local) taxes, just as long as you live in the state in which the bond was issued.


Do you have to pay taxes on your savings account?

If you are earning interest on a savings account(s), then you are required to report any interest earned to the IRS and pay whatever taxes might be due on it. If you do not report and pay the taxes due on interest from a savings account, the IRS might flag it and charge you penalty fees.

How is interest taxed?

Interest is taxed at ordinary income tax rates. This means that the tax rate you pay on your earned income will also be the tax rate you will pay on earned interest. Exceptions do exist, like for U.S. Treasury bonds and savings bonds, but generally speaking, most interest is considered taxable at the time you receive it or withdraw it.

How much tax do you pay on savings accounts?

Interest from a savings account is taxed at your earned income tax rate for the year. To determine how much you will pay in taxes on a savings account, figure out what your total taxable income is and which tax bracket that places you in. Then figure out how much you earned on interest in savings accounts, and multiply that by your tax rate. This will tell you how much you will pay in taxes on your savings account interest for a given tax year.

Final Thoughts

The thing to remember is that when you file your taxes at the end of each financial year, you’ll need to declare ALL of your sources of income. This includes declaring any interest you’ve earned from a savings account — no matter how small the amount.

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