You owe federal income tax on every dollar of interest your high yield savings account earns
The interest your account generates is taxable income. The IRS treats it the same way it treats wages or salary — you report it on your tax return and pay tax at your ordinary income tax rate, which ranges from 10% to 37% depending on your total income and filing status. There is no special lower rate for savings interest, and there is no threshold below which the interest becomes tax-free.
Your bank will send you a Form 1099-INT each January if your account earned $10 or more in interest during the previous year. You use this form to report the interest on your federal tax return. Some states also tax savings interest, though a handful of states exempt it entirely.
The tax is due when you file your return, usually by April 15 of the following year. You do not pay it directly to the bank — you pay it through your tax return, either as part of your overall tax bill or by reducing a refund you would otherwise receive.
Key Takeaways
- Interest earned in a high yield savings account is taxed as ordinary income at your federal tax rate, which depends on your total income for the year.
- Your bank sends a Form 1099-INT if you earned $10 or more in interest, and you report this amount on your federal tax return.
- Some states tax savings interest and some do not, so your state tax bill may also include this income depending on where you live.
- The tax is owed in the year you earn the interest, even if you do not withdraw the money from the account.
How your tax bracket affects what you owe
Your tax rate on the interest depends on your total income for the year, not just the savings interest. If you earn $50,000 in wages and $500 in interest, that $500 is taxed at whatever your marginal rate is — the rate that applies to your highest dollars of income.
For 2024, the federal tax brackets are: 10% on income up to $11,600 (single filer), 12% up to $47,150, 22% up to $100,525, 24% up to $191,950, 32% up to $243,725, 35% up to $609,350, and 37% on anything above that. These brackets adjust slightly each year for inflation. If you are married filing jointly, the brackets are roughly double.
This means a person in the 22% bracket who earns $1,000 in interest owes $220 in federal tax on that interest. Someone in the 37% bracket owes $370 on the same $1,000. The higher your income, the more you owe on the same amount of interest.
State income tax on savings interest
Most states that have an income tax also tax interest income. State rates typically range from 1% to 13%, depending on the state and your income level. A few states — including Pennsylvania, Illinois, and Mississippi — exempt interest and dividend income from state tax entirely. Others, like California and New York, tax it at their ordinary income tax rates.
If you live in a state with no income tax (Florida, Texas, Wyoming, and others), you owe no state tax on the interest. If you live in a state with income tax, check your state's tax authority website or a tax professional to confirm whether savings interest is taxed in your state and at what rate.
When you receive the Form 1099-INT and what to do with it
Your bank mails or makes available the Form 1099-INT by January 31 of the year following the one in which you earned the interest. If you earned less than $10 in interest, the bank is not required to send the form, but you still owe tax on that interest if you file a return.
When you receive the form, check it for accuracy. The form shows the account holder's name, Social Security number, and the total interest earned. If the amount is wrong, contact your bank when ready and ask for a corrected form. You will need the correct amount to file your return accurately.
Report the interest on your federal return using Schedule B (if you have more than $1,500 in interest income) or directly on Form 1040 (if you have $1,500 or less). Your tax software will walk you through this step. If you file your taxes with a professional, give them the Form 1099-INT and they will handle the reporting.
How to estimate your tax bill before the year ends
You can calculate roughly how much tax you will owe on your interest by multiplying the interest earned by your tax bracket. If your account earns $2,000 in interest and you are in the 24% federal bracket, you will owe approximately $480 in federal tax (plus any state tax).
Most high yield savings accounts show your year-to-date interest in your account dashboard or monthly statement. You can use this number to estimate your tax liability as the year progresses. This is useful if you are self-employed or have other income that does not have taxes withheld, because you may need to make quarterly estimated tax payments to avoid penalties.
If you think you will owe $1,000 or more in tax for the year and have not had enough tax withheld from other income, the IRS requires you to make estimated quarterly payments. Form 1040-ES walks you through the calculation, or a tax professional can help you determine whether you need to pay quarterly.
Tax-advantaged alternatives to regular high yield savings accounts
If you want to earn interest while deferring or reducing taxes, a few options exist, though they come with restrictions. A traditional IRA or 401(k) lets you earn interest tax-free until you withdraw the money in retirement, at which point you pay tax on the full amount. A Roth IRA lets you earn interest tax-free permanently if you follow the withdrawal rules.
These accounts have annual contribution limits ($7,000 for an IRA in 2024, higher for 401(k)s) and rules about when you can withdraw the money without penalty. They are not a replacement for a high yield savings account — they are meant for longer-term savings — but they can be useful if you have money you do not need to access for several years.
A 529 college savings plan also grows tax-free if the money is used for education expenses. If you are saving for a child's college costs, this can be a tax-efficient way to earn interest.
What happens if you do not report the interest
The IRS receives a copy of every Form 1099-INT your bank sends. If you do not report the interest on your tax return, the IRS will notice the discrepancy and may send you a notice asking you to pay the tax plus interest and penalties. The penalty for not reporting income is typically 20% of the unpaid tax, plus interest that accrues from the original due date.
Even small amounts of interest should be reported. If you earned $50 in interest and did not report it, and the IRS catches it, you could owe the $50 in tax plus a $10 penalty plus interest. It is not worth the risk, and reporting takes only a few minutes when you file your return.
Frequently Asked Questions
Do I owe tax on interest if I do not withdraw it from the account?
Yes. You owe tax on interest in the year you earn it, regardless of whether you leave it in the account or withdraw it. The IRS taxes interest on an accrual basis, meaning when it is credited to your account, not when you spend it.
What if my interest income is very small, like $15?
You still owe tax on it. The bank does not have to send a Form 1099-INT for amounts under $10, but you are required to report any interest you earn. If you earned $15 and are in the 22% bracket, you owe roughly $3.30 in federal tax on that amount.
Can I deduct the taxes I pay on savings interest?
No. Interest income is reported as income on your return, and you pay tax on it. You cannot deduct the tax itself. However, if you have investment expenses or losses, those may offset some of your interest income in certain situations — a tax professional can advise on your specific case.
Does my employer withhold taxes on savings interest?
No. Your employer withholds taxes only on wages and salary. Savings interest has no withholding, so you are responsible for paying the tax when you file your return or through quarterly estimated payments if you owe a large amount.
What if I have accounts at multiple banks?
Each bank sends its own Form 1099-INT for the interest earned at that bank. You add up all the interest from all your accounts and report the total on your tax return. The IRS will receive copies of all the forms, so make sure your total matches.