Hint: Yes. You generally will owe taxes on interest you earn in a savings account.
One of the best features of savings accounts is the ability to earn interest. Without doing any work, you earn money simply for keeping your cash safely tucked away in an FDIC-insured account. But is savings account interest taxable?
In most cases, the answer is yes—the money you earn in savings accounts is taxable. Tax-advantaged savings accounts, such as individual retirement accounts (IRAs) and 401(k) plans, are the exception.
As with any other income, you must report taxable interest on your annual income tax return. Here's a closer look at how taxes are applied to savings account interest, and the terms and forms you may need to know when filing your taxes.
Taxable Interest on Savings Accounts
In most cases, the interest you earn from a savings account is considered taxable income by the Internal Revenue Service (IRS). As with income from your job, investments or anywhere else, you may avoid penalties by keeping detailed records and reporting all income on your tax return.
How to calculate interest on savings accounts
Interest is typically paid as a percentage of your savings account balance. For example, if you have a $100 balance and the account offers a 1% annual percentage yield (APY), you would earn $1 over a year. The higher the interest rate or account balance, the more your earnings will increase. With most savings accounts, interest rates can change at any time without notice.
Your taxes are based on that interest earned plus your taxable income for the year. Check your final bank statement of the year or look for a tax notification from your bank for the final amount for tax purposes.
Use our handy calculator to see how much interest you can earn with a Synchrony Bank High Yield Savings Account.
How tax is calculated on savings accounts
To calculate taxes owed for a savings account, you'll need to know the total interest earned, as calculated above, and your expected annual taxable income. Using your total income, you can look up your tax bracket, which is set by the IRS. Your tax bracket outlines the percentage of your income, including interest income, that you pay in taxes.
For example, assume your top income tax rate is 24% based on your income, and that you earned $20 in interest income for the year. Your taxes would be 24% of the $20 earned ($20 x 0.24), or $4.80.
If you earn $10 or more in interest in a year, you'll automatically receive a 1099-INT tax form from your bank with a summary of your earnings across all your accounts. The IRS also receives a copy. The tax rate you pay varies based on your income and other factors. Check with a trusted tax professional or preferred tax software to determine your income tax rate.
Taxable Interest on CDs
In practice, a certificate of deposit (or CD) works a bit differently from a regular savings account, although the IRS treats them much the same.
A CD is a type of timed deposit, meaning that once it's open, you generally can't add or withdraw money until its maturity date, when the term ends. At that point, you can withdraw the cash penalty-free, along with any interest you've earned. Term lengths for CDs can range from weeks to years, and interest accrues in your account throughout that period.
Even though you might not be able to access your CD interest for some time, the IRS still requires you to pay taxes on the interest you earn in your CD each year, regardless of when it matures. For example, if you have a two-year CD, you'll pay taxes on the interest you earn for this year and next year, even though you won't necessarily be withdrawing anything this year.
One exception applies to CDs held in tax-advantaged savings accounts. The tax rules work differently for these types of accounts, which we'll look at next.
Taxable Interest on Tax-Advantaged Savings Accounts
Some types of specialized savings accounts allow you to delay paying taxes on interest until you actually withdraw money from the account. This is known as tax-deferred interest.
Accounts with tax-deferred interest
In most cases, tax-deferred interest is limited to tax-advantaged accounts for retirement, healthcare or education. For example, a traditional IRA enables you to earn interest and defer paying taxes on it until you withdraw in retirement, when you're likely to have a lower income tax rate than during your working years.
However, if you withdraw money early or outside of approved parameters, you could owe taxes and penalties. In addition to IRAs, which are typically opened and managed independently, you may have access to tax-deferred savings through an employer-sponsored retirement plan, such as a 401(k), 403(b) or 457 plan.
Accounts with tax-exempt interest
Don't confuse a traditional IRA or 401(k) with a Roth-designated account. Unlike a traditional IRA or 401(k), which allows you to delay taxes on interest until later, the Roth version of these accounts allows you to avoid paying taxes on interest entirely for qualified distributions.
The trade-off is that you can't deduct any contributions you make to a Roth account on your taxes, so you don't get the immediate tax-lowering benefits like with a traditional IRA.
Other types of savings accounts with tax-exempt interest for qualified withdrawals include health savings accounts (HSAs), Achieving a Better Life Experience (ABLE) accounts and 529 college savings plans.
Penalties on tax-advantaged savings account withdrawals
When you follow the rules for making an appropriate withdrawal, it's called making a "qualified distribution." If you don't follow those rules, you may incur extra penalties.
For example, most retirement accounts require you to wait until you're 59 ½ years old to withdraw. If you withdraw before that age, you'll generally owe a 10% penalty, outside of some rare exceptions. You may also be penalized if you don't withdraw a required minimum distribution (RMD) from your traditional retirement accounts starting at age 73. An RMD is the required amount you must withdraw based on your account balance and age. After you make a withdrawal, a savings account could be the best place to deposit your funds.
When in doubt, work with a tax professional to ensure you don't accidentally owe unexpected taxes.
Tax Advantages of Savings Accounts
Most savings accounts don't come with significant tax advantages. However, you may be able to lower your total taxable income—effectively wiping out your taxes from savings account interest, among other sources—with tax deductions and tax credits.
Using tax deductions to lower taxes on savings account interest
Deductions lower your taxable income, so you'll pay taxes as if you had earned less than you actually did. There are many deductions to claim that can potentially lower your tax bill.
In 2025, the One Big Beautiful Bill Act (OBBBA) introduced several changes to deductions available for Americans. For example, it increased the standard deduction that taxpayers can use instead of claiming individual itemized tax breaks. Seniors are also eligible to claim a blanket $6,000 deduction each year through 2028.
Using tax credits to lower taxes on savings account interest
Tax credits are even more valuable, as they directly lower the taxes you owe at the end of the year.
The OBBBA made several changes to tax credits: It repealed some valuable credits, such as the $3,200 home energy tax credit. But it also made some temporary tax credits permanent. For example, people with disabilities can permanently claim the Saver's Credit for contributions to their ABLE accounts.
It also introduced new tax benefits, including a $1,000 government-sponsored contribution to a new savings account for children born between 2025 and 2028. After the children turn 18, the account will convert into a traditional IRA.
Managing Taxes on Savings Accounts
While the interest you earn on a savings account may be taxable, that's not necessarily a bad thing. If you owe a lot of taxes due to a savings account, it's because you earned a lot of interest during the year. For 2026, tax rates on savings accounts range from 10% to 37%, depending on your overall income.
The safety of a savings account can make it an attractive place to store funds for various reasons, such as emergency savings or a down payment on a home. With a high yield savings account, your cash earns money for you while you go about your everyday life. Just be sure to plan on paying taxes on those earnings, unless your cash is stored in a tax-advantaged savings account.
LEARN MORE: Tax Credits vs Deductions: Key Differences and Similarities