How Much Tax Do You Pay on Savings Interest?

Interest earned on savings can contribute to your financial growth, but it is also generally subject to taxation. Understanding how this interest is taxed is an important part of managing personal finances. The taxes on savings interest can impact your overall earnings, making it helpful to know how these amounts are calculated and reported.

Understanding Taxable Savings Interest

Interest generated from various savings vehicles, such as traditional savings accounts, high-yield savings accounts, certificates of deposit (CDs), and money market accounts, is generally considered taxable income. This interest is categorized as ordinary income by the IRS. This means it is taxed at the same rates as other forms of ordinary income, such as wages or salaries, rather than at potentially lower capital gains rates.

The amount of tax you pay on savings interest is determined by your marginal tax bracket. The United States operates under a progressive tax system, meaning different portions of your income are taxed at different rates. Your total taxable income, which includes all earned income plus your savings interest, determines which tax bracket applies to the highest portion of your income. For instance, the federal income tax system has seven tax rates, ranging from 10% to 37% as of 2025. If your income falls into a 24% tax bracket, your marginal tax rate is 24%, and this rate applies to the portion of your income within that bracket.

Reporting Savings Interest on Your Tax Return

Financial institutions are generally required to report interest income to both the taxpayer and the IRS. If you earn $10 or more in interest from a single payer during the year, the bank or financial institution will issue Form 1099-INT, “Interest Income.” While financial institutions are only required to issue a Form 1099-INT if the interest totals $10 or more, all interest earned, regardless of the amount, is taxable and must be reported on your tax return.

When preparing your federal income tax return, interest income reported on Form 1099-INT is typically entered on Schedule B, “Interest and Ordinary Dividends.” This schedule is required if your total taxable interest from all sources exceeds a certain threshold, which is $1,500. If your total interest income is below this threshold, you can report it directly on Form 1040, the main federal income tax form, on the line designated for taxable interest.

Tax-Advantaged Savings Options

Certain types of savings accounts and investments offer distinct tax treatments that can reduce or defer the tax burden on interest or earnings. Tax-deferred accounts, such as traditional Individual Retirement Arrangements (IRAs) and 401(k) plans, allow earnings to grow without being taxed annually. Instead, taxes are generally paid when withdrawals are made in retirement, at your ordinary income tax rates. This deferral can be beneficial, as it allows your money to potentially grow more over time.

Some investments offer tax-exempt interest, meaning the interest earned is not subject to federal income tax. An example includes certain municipal bonds, which are debt securities issued by state and local governments. The interest on these bonds can be exempt from federal income tax and, in some cases, from state and local taxes if the bond is issued within your state of residence.

Other accounts provide tax-free withdrawals under specific conditions. Roth IRAs, for instance, are funded with after-tax dollars, and qualified withdrawals in retirement, including earnings, are entirely tax-free. Health Savings Accounts (HSAs) offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and qualified withdrawals for medical expenses are also tax-free. Similarly, 529 plans, designed for educational expenses, allow earnings to grow tax-deferred, and qualified withdrawals for higher education costs are tax-free.