The IRS taxes your high yield savings interest as ordinary income
The interest your high yield savings account earns is taxed the same way as wages or salary — as ordinary income. That means whatever rate you pay on your regular income is the rate you pay on the interest. If you earn $500 in interest in a year and you're in the 22% tax bracket, you owe roughly $110 in federal tax on that interest alone.
The bank doesn't automatically take this tax out of your account. Instead, you report the interest when you file your tax return, or the bank reports it to the IRS on a form called a 1099-INT, and you're expected to pay what you owe. This is different from how some investments work — stocks held long-term, for example, get taxed at lower rates.
The amount of tax you actually owe depends on your total income for the year and which tax bracket you fall into. Someone earning $30,000 a year pays a lower percentage on interest than someone earning $150,000. Your state may also tax this interest, depending on where you live.
Key Takeaways
- Interest from high yield savings accounts is taxed as ordinary income at your regular tax rate, not at a lower investment rate.
- Banks report interest of $10 or more on a 1099-INT form, which they send to you and the IRS by January 31.
- You report this interest on your tax return even if the bank doesn't send you a 1099-INT, so keep your own records.
- State income tax may also explore to your interest, depending on your state's rules.
- The more interest you earn, the higher your total tax bill — but the interest itself is still worth earning even after taxes.
When the bank sends you a 1099-INT form
If your high yield savings account earns $10 or more in interest during a calendar year, the bank must send you a 1099-INT form by January 31 of the following year. This form shows how much interest you earned. The bank sends a copy to the IRS at the same time, so the IRS knows about your interest income whether you report it or not.
If you earn less than $10, the bank doesn't have to send a 1099-INT, but you still owe tax on that interest. You'll need to track it yourself by looking at your account statements or the interest deposits the bank made to your account throughout the year.
Some banks let you see your year-to-date interest in your online account or through a statement. Write this number down or take a screenshot — you'll need it when you file your taxes, especially if the bank doesn't send a 1099-INT.
How to report the interest on your tax return
When you file your federal tax return, you report the interest income on Schedule B (if you have other investment income) or directly on your Form 1040, depending on how much interest you earned and what other income you have. The exact line varies by year, so check the current year's instructions or ask a tax preparer.
If you use tax software like TurboTax or TaxAct, the software will ask you about interest income and put it in the right place automatically. If you file by hand or with a preparer, bring your 1099-INT or your own record of the interest amount.
You report the same interest to your state if your state has an income tax. Some states tax interest income the same way the federal government does; others have different rules. Check your state's tax agency website or ask a preparer if you're unsure whether your state taxes savings account interest.
Why high yield accounts are still worth it despite taxes
Even though you pay tax on the interest, a high yield savings account earning 4% to 5% annually is still better than a regular savings account earning 0.01%. Let's say you have $10,000 in a high yield account earning 4.5% per year. You earn $450 in interest. If you're in the 22% tax bracket, you owe about $99 in tax, leaving you with $351 in actual gain. In a regular savings account earning 0.01%, you'd earn $1 and owe almost nothing in tax — but you'd also have almost nothing.
The tax is on the interest you earn, not on your original deposit. Your $10,000 stays yours no matter what. The interest is extra money the bank pays you for letting them use your deposit, and a portion of that extra money goes to taxes.
High yield accounts also keep your money safe and accessible, which matters more than the tax treatment for most people. You can withdraw your money anytime without penalty, unlike CDs or other savings products that charge you for early withdrawal.
How your tax bracket affects what you owe
Your tax bracket is the percentage of your income that goes to federal tax. The more you earn, the higher your bracket. Interest income pushes your total income up, which can move you into a higher bracket — meaning you pay a higher percentage not just on the interest, but potentially on some of your other income too.
For example, if you earn $45,000 in wages and are in the 12% bracket, and then you earn $5,000 in interest, that $5,000 might push you into the 22% bracket. You'd owe 22% on at least part of the interest, not 12%. This is called "bracket creep," and it's one reason people with large savings accounts sometimes work with a tax preparer to plan ahead.
You can't avoid this tax by moving your money around or using different banks — the IRS counts all your interest income from all sources in the same year. But knowing your bracket helps you understand roughly how much tax you'll owe.
State taxes on savings account interest
Most states that have an income tax also tax interest income. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — don't have a state income tax at all, so residents pay no state tax on savings interest. New Hampshire and Tennessee tax only interest and dividend income, not wages.
If you live in a state with income tax, you'll report your interest on your state tax return the same way you report it to the federal government. Some states use the same 1099-INT form; others have their own reporting requirements. Your state's tax agency website has instructions for your specific state.
If you moved during the year or earned interest in a different state, the rules get more complex. A tax preparer can help you figure out which state gets which portion of your income.
Keeping records of your interest income
Save your 1099-INT forms and your account statements showing interest deposits. The IRS can ask for proof of the interest you reported, and the bank's records are the best proof. Keep these documents for at least three years — that's how long the IRS typically has to audit a return.
If you have accounts at multiple banks, each bank sends its own 1099-INT. Add them all together when you report your total interest income. Some people use a straightforward spreadsheet to track interest from each account by month, which makes it straightforward to add up at tax time.
If the bank's 1099-INT doesn't match your records, contact the bank to ask about the difference. Sometimes interest is posted on different dates than you expect, or a deposit might have been made in January for interest earned in December of the previous year.
Frequently Asked Questions
Do I owe taxes on interest if I don't get a 1099-INT?
Yes. If you earn less than $10 in interest, the bank doesn't send a 1099-INT, but you still owe tax on that interest. Track it yourself using your account statements and report it on your tax return. The IRS expects you to report all interest income whether or not you receive a form.
Can I deduct the taxes I pay on savings interest?
No. Interest income is taxed as ordinary income, and you can't deduct the tax you pay on it. You report the full interest amount and pay tax on it at your regular rate. This is different from some investments where you might be able to deduct losses.
What if I earned interest in multiple high yield accounts?
Each bank sends its own 1099-INT if the interest is $10 or more. Add all the interest amounts together and report the total on your tax return. If some accounts earned less than $10, add those amounts to your total as well.
Does moving money between accounts affect how much tax I owe?
No. Moving your own money doesn't create taxable income. You only owe tax on the interest the bank pays you, not on transfers between your own accounts or deposits you make from your paycheck.
Is there a way to avoid paying tax on savings interest?
Not legally. Interest income is taxable. Some people use tax-advantaged accounts like IRAs or 529 plans where interest grows tax-free, but those accounts have rules about when you can withdraw the money. For regular savings, you pay tax on the interest earned.