Short answer: interest earned on a regular savings account, money market account, or CD is taxable as ordinary income at both federal and (usually) state levels. Banks report interest of $10 or more to the IRS each January on Form 1099-INT.
This isn't optional or hidden — and it's not nearly as bad as people often fear. Here's what to expect.
How it gets reported
Each January, your bank sends a Form 1099-INT showing the total interest you earned the previous year. They also send the same form to the IRS. You enter the figure on Schedule B of your Form 1040 if your total interest exceeds $1,500 for the year, or directly on Form 1040 if it's less.
Don't ignore the 1099. The IRS already has the number. If you don't report it, you'll likely get a notice (CP2000) the following year asking for the missing tax plus interest and penalties.
If you earn less than $10 in interest, the bank doesn't have to issue a 1099 — but you're still technically required to report the interest. In practice, very few people report sub-$10 interest, and the IRS doesn't pursue it.
How much you'll owe
Interest is taxed as ordinary income at your marginal federal tax rate, plus state income tax in most states. Approximate 2026 marginal federal rates [verify against 2026 IRS tables]:
| Income range (single filer) | Federal marginal rate |
|---|---|
| $0–$11,925 | 10% |
| $11,925–$48,475 | 12% |
| $48,475–$103,350 | 22% |
| $103,350–$197,300 | 24% |
| $197,300–$250,525 | 32% |
| $250,525–$626,350 | 35% |
| $626,350+ | 37% |
If you're in the 22% bracket and earn $1,000 in savings interest, you owe $220 federal plus whatever your state charges. Effective after-tax interest in a 4.5% APY account at 22% federal + 5% state = about 3.3%.
This tax drag is one reason long-term savers favor tax-advantaged accounts (Roth IRA, 401k, HSA) over regular taxable savings.
States with no income tax
Nine states don't have a state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. (New Hampshire taxes investment income through 2026 but is phasing it out.)
If you live in one of these states, you only owe federal tax on savings interest.
How to lower the tax bill
Several legitimate ways to reduce taxes on savings interest:
1. Use tax-advantaged accounts where appropriate.
- Roth IRA: After-tax contributions, but interest and gains grow tax-free forever. 2026 contribution limit is $7,000 ($8,000 if 50+).
- Traditional IRA / 401(k): Pre-tax contributions defer income tax until withdrawal. Doesn't help with current-year tax bill on interest, but the interest itself isn't taxed annually.
- Health Savings Account (HSA): Pre-tax contributions, tax-free growth, tax-free withdrawals for qualified medical expenses. Triple tax advantage. Requires high-deductible health plan.
2. Consider Treasury bills (T-bills) for taxable savings.
Interest from US Treasury securities is exempt from state and local income tax (still federally taxable). For someone in California or New York with high state taxes, switching from a HYSA to T-bills can meaningfully boost after-tax returns at similar yields.
3. Use I-Bonds for inflation protection (if appropriate).
US Series I Savings Bonds pay interest tied to inflation. Federally taxable but state-exempt, and tax can be deferred until you cash them in. Annual purchase limit is $10,000 per person.
4. Time large interest payments around your tax situation.
If you're between jobs and expect a low-income year, opening a high-balance account or maturing a CD in that year means you're taxed at lower marginal rates.
Common myths
"If I don't withdraw the interest, I don't owe tax." Wrong. Interest is taxed in the year it's credited to your account, regardless of whether you withdraw it. If your savings account earns interest in December, that's December income even if it sits there earning more interest the next year.
"I can just not report small amounts." Technically you're required to report all interest, even amounts under $10 (where the bank doesn't issue a 1099). Practically, the IRS doesn't pursue tiny amounts, but it's not legally optional.
"FDIC-insured means tax-free." No. FDIC insurance protects your principal from bank failure. It has no relationship to tax treatment.
"CD interest is taxed only at maturity." Mostly wrong. For most CDs, interest is taxable in the year it's credited (typically annually for terms over a year). Some CDs only credit interest at maturity, in which case it's all taxable in that year. Check the specific terms.
Practical takeaways
- Plan for tax on savings interest at your marginal rate. Mentally discount HYSA APYs by 25-35% to estimate after-tax returns.
- Consider tax-advantaged accounts for long-term savings goals — the difference compounds enormously over decades.
- T-bills can be more tax-efficient than HYSAs for residents of high-tax states.
- Save the 1099-INT form when it arrives in January. You'll need it to file taxes.
To project after-tax returns, run the APY calculator at the nominal rate, then mentally subtract your effective tax rate to estimate net growth.