Taxes on Savings Account Interest: The Complete Guide

How Savings Interest Is Taxed

Interest from savings accounts, CDs, and money market accounts is taxed as ordinary income—the same as your paycheck. It's added to your total income and taxed at your marginal rate.

Unlike long-term capital gains or qualified dividends (which get preferential rates), interest income receives no special tax treatment.

2026 Federal Tax Brackets

What You'll Actually Pay: Examples

Let's calculate the tax on $1,000 of interest income at different brackets:

Even after taxes, high-yield savings accounts beat traditional banks. A 22% bracket taxpayer earning 4% APY keeps 3.12%—still vastly better than Chase's 0.01%.

The 1099-INT Form

If you earn more than $10 in interest from a bank during the year, they'll send you a 1099-INT form by January 31st.

The form reports:

• Box 1: Interest income (what you earned)
• Box 3: Interest on U.S. Savings Bonds (if applicable)
• Box 4: Federal tax withheld (usually $0 for savings accounts)

Important: Even if you don't receive a 1099-INT (because you earned less than $10), you must still report the interest on your tax return. The IRS knows about it either way.

State Taxes on Interest

Most states also tax interest income. However, a few states have no income tax:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee (no tax on wages/interest)
• Texas
• Washington
• Wyoming

If you live elsewhere, add your state rate to your federal rate for total tax impact.

Strategies to Reduce Tax on Interest

1. Use Tax-Advantaged Accounts

Interest earned in IRAs, 401(k)s, and HSAs is tax-deferred or tax-free. If you're saving for retirement, these accounts shelter interest from annual taxation.

2. Consider I-Bonds

Series I Savings Bonds defer taxes until you cash them and may be tax-free if used for education. Currently paying 3.11% (as of January 2026).

3. Municipal Bond Funds

Interest from municipal bonds is often federal tax-free (and state tax-free if issued in your state). Not savings accounts, but an alternative for tax-sensitive investors.

4. Gift to Lower-Bracket Family Members

If you're in a high bracket and have children with no income, the first ~$1,300 of their unearned income is tax-free. Complex rules apply—consult a tax advisor.

Sign-Up Bonuses Are Taxable Too

Bank bonuses ($200 for opening an account, etc.) are taxable as ordinary income. The bank will send a 1099-INT or 1099-MISC for bonuses over $10.

On a $200 bonus in the 22% bracket, you'll owe $44 in taxes. Still worth it—$156 in free money—but factor taxes into your calculations.

When Interest Might Push You Into a Higher Bracket

Interest income can push you into a higher tax bracket, but only the income above the threshold is taxed at the higher rate.

Example: If you're single earning $47,000 salary and $1,000 in interest:

• $47,000 taxed in the 12% bracket
• $1,000 taxed in the 22% bracket (crosses the $47,150 threshold)

You don't pay 22% on everything—just the amount over the threshold.

The Bottom Line

Yes, savings account interest is taxed. But it's still worth earning:

• A 4% APY after 22% taxes = 3.12% effective rate
• That's still 312x better than Chase's 0.01%
• The tax applies regardless of where you save—might as well earn more

Don't let taxes discourage you from high-yield savings. The IRS takes a cut of all income—earning more and keeping a percentage is always better than earning less.