The short answer: interest from a high yield savings account counts as income, and you owe federal income tax on it
The money your bank pays you for keeping your savings there is taxable income. The IRS treats it the same way it treats wages or salary — you have to report it on your tax return. The amount you owe depends on your total income and tax bracket, but there is no way around reporting it.
The bank will send you a form called a 1099-INT (or sometimes a 1099-OID) in January or February of the following year, listing exactly how much interest you earned. You use that number when you file your taxes. If you earned less than $10 in interest, the bank may not send the form, but you still owe tax on it if you had any tax liability that year.
This applies whether the account is at a traditional bank, an online bank, or a credit union. It does not matter how high the interest rate is — even the best rates available today are taxable.
Key Takeaways
- Interest earned in a high yield savings account is taxable income and must be reported to the IRS on your tax return.
- Your bank sends you a 1099-INT form showing the interest you earned, which you use when filing taxes.
- The tax you owe depends on your tax bracket — the higher your total income, the higher the percentage of interest you pay in taxes.
- State and local income taxes may also explore to savings interest, depending on where you live.
- You can reduce taxable interest by keeping money in tax-advantaged accounts like IRAs or 529 plans instead of regular savings accounts.
How the IRS counts savings interest as income
The IRS defines interest income as money you receive for lending your money to someone else — in this case, the bank. When you deposit money in a savings account, the bank uses that money to make loans to other customers. In return, they pay you interest. That payment is income to you, just like a paycheck.
You report this interest on your tax return in the section for "interest and dividend income." If you have multiple savings accounts, you add up all the interest from all of them and report the total. The bank does this work for you by sending the 1099-INT form, but you are responsible for including it on your return.
If you forget to report it or do not receive a 1099-INT, the IRS will likely catch it anyway — banks send copies of these forms to the IRS too. Unreported interest can result in penalties and interest charges on top of the taxes you owe.
What tax rate applies to your interest
The tax rate on your savings interest depends on your tax bracket — the range of income that determines what percentage of your income goes to federal taxes. If you earn $30,000 a year and your savings interest is $500, that $500 is taxed at the same rate as your other income in that bracket.
For 2024, federal tax brackets range from 10% to 37%, depending on how much you earn and whether you file as single, married, or head of household. If you are in the 22% bracket and earn $1,000 in interest, you will owe roughly $220 in federal income tax on that interest (before any deductions or credits that might lower your bill).
The higher your total income, the higher your tax bracket, and the more you pay in taxes on the interest. Someone earning $200,000 a year pays a much higher percentage on savings interest than someone earning $40,000.
State and local taxes on savings interest
Most states also tax interest income. If you live in a state with an income tax, you will owe state tax on your savings interest in addition to federal tax. The state tax rate varies — some states tax interest at the same rate as wages, while others have a flat rate or a different bracket system.
A few states do not tax interest income at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you only owe federal tax. If you live elsewhere, check your state's tax website or ask a tax preparer what rate applies to interest income in your state.
Some cities also impose local income taxes that include interest. This is less common, but it applies in places like New York City, Columbus, Ohio, and parts of Pennsylvania. If you live in a city with a local income tax, factor that into your calculation.
How much interest triggers a tax filing requirement
You must report interest income on your tax return if you have any tax liability for the year — meaning you owe any federal income tax at all. The amount of interest does not have to be large. Even $1 in interest must be reported if you are required to file.
Whether you are required to file depends on your total income, age, and filing status. For 2024, a single person under 65 must file if their income exceeds $14,600. A married couple filing jointly must file if their combined income exceeds $29,200. These thresholds change each year.
If you are not required to file but you had taxes withheld from paychecks or other income, you may want to file anyway to get a refund. In that case, you would report the interest income as part of your return.
Ways to reduce taxes on savings interest
One option is to keep money in tax-advantaged accounts instead of a regular high yield savings account. A traditional IRA or Roth IRA allows you to earn interest without paying taxes on it each year. With a traditional IRA, you do not pay taxes until you withdraw the money in retirement. With a Roth IRA, you never pay taxes on the interest if you follow the rules.
A 529 college savings plan works similarly — interest grows tax-free as long as you use the money for education expenses. If you have children or grandchildren, this can be a significant tax savings.
These accounts have limits on how much you can contribute each year, and they have rules about when you can withdraw the money. But if you have savings you are setting aside for retirement or education, using these accounts instead of a regular savings account means you keep more of the interest you earn.
Another approach is to keep only the money you need for emergencies in a high yield savings account and put longer-term savings into tax-advantaged accounts. This balances the need for accessible cash with tax efficiency.
What to do when you receive your 1099-INT
In January or February, your bank will mail or email you a 1099-INT form showing the interest you earned in the previous year. The form lists the account number, the amount of interest, and sometimes other details. Keep this form — you will need it when you file your taxes.
If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. Add up all the interest amounts and report the total on your tax return. If you use tax software like TurboTax or TaxAct, you enter the information from the 1099-INT and the software calculates your tax liability.
If you file with a tax preparer or accountant, bring all your 1099-INT forms with you. They will include the interest income in your return. If you do not receive a 1099-INT by early March, contact your bank — they may have sent it to an old address or email.
Frequently Asked Questions
Do I have to pay taxes if I only earned a few dollars in interest?
Yes, if you are required to file a tax return that year. The amount does not matter — even $1 in interest must be reported. However, if your total income is below the filing threshold for your age and status, you may not be required to file at all, in which case you would not report the interest.
What if my interest income pushes me into a higher tax bracket?
Your interest income is added to your other income, and your total determines your tax bracket. If the interest pushes you over a threshold, you will pay the higher rate on the interest and any other income in that bracket. This is rare with savings interest alone, but it can happen if you have other income sources too.
Can I deduct the interest I earn as a business expense?
No. Interest income is taxable income, not a business expense. You cannot deduct it. However, if you have investment expenses or losses, those may offset some of your interest income — talk to a tax preparer about your specific situation.
Do I owe taxes on interest if I move the money to a different account before the year ends?
Yes. You owe taxes on all interest earned during the year, regardless of when you move the money or close the account. The 1099-INT will show the interest earned in that calendar year, and that is what you report.
What happens if the bank sends a 1099-INT but I did not actually receive that much interest?
Contact the bank when ready. Errors happen — the form might list interest from a different account, or the amount might be wrong. The bank can issue a corrected form. Do not file your taxes with an incorrect 1099-INT; get it fixed first.