Is Savings Account Interest Taxable?

Savings account interest is generally subject to taxation. Understanding how this interest is taxed and reported is an important aspect of managing personal finances. Taxpayers should be aware of specific rules and reporting requirements to ensure compliance.

How Savings Account Interest is Taxed

Interest earned on a savings account is considered ordinary income for tax purposes, taxed similarly to wages. Federal income tax applies, and state and local income taxes may also apply depending on the taxpayer’s residence.

The tax applies to the interest earned, not the principal. Interest is taxable in the year it is credited to the account, even if funds are not withdrawn or are automatically reinvested. Tax liability arises as interest accumulates, regardless of physical receipt.

Reporting Savings Account Interest to the IRS

Financial institutions are required to report interest income paid to account holders and the Internal Revenue Service (IRS). This reporting is done using Form 1099-INT, Interest Income, which details the total interest earned by an account holder during the calendar year.

Taxpayers use Form 1099-INT to report interest income on their federal tax return. If taxable interest exceeds $1,500, it is reported on Schedule B, Interest and Ordinary Dividends, filed with Form 1040. For amounts under $1,500, the income can be reported directly on Form 1040, though it remains taxable.

Special Scenarios for Savings Account Interest

Interest earned on joint savings accounts is reported under the primary account holder’s Social Security Number. For tax purposes, the income may be divided and reported by each co-owner based on their contributions and ownership percentages. Joint account holders are responsible for correctly allocating and reporting their share of the interest income.

For accounts held by minors, such as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, the interest earned is taxable to the minor. If the minor’s unearned income exceeds certain thresholds, the “kiddie tax” rules may apply. For the 2025 tax year, the first $1,350 of a child’s unearned income is not taxed, the next $1,350 is taxed at the child’s rate, and any unearned income above $2,700 is taxed at the parents’ marginal tax rate.

Even very small amounts of interest are taxable, regardless of whether a Form 1099-INT is issued. Financial institutions are required to issue a Form 1099-INT only if the interest paid is $10 or more. If a taxpayer earns less than this amount, the interest is still considered taxable income and should be reported on their tax return.