You owe federal income tax on every dollar of interest your high-yield savings account earns, taxed at your ordinary income rate

The interest your account generates is treated as ordinary income by the IRS. If your account earns $500 in interest over a year, that $500 is added to your total taxable income for that year. You pay tax on it at whatever rate applies to your income bracket — the same rate you pay on wages or salary, not a special lower rate.

Your bank will send you a Form 1099-INT in January showing how much interest you earned the previous year. You report this amount on your tax return. The bank also sends a copy to the IRS, so they know what you earned whether you report it or not.

State and local income taxes explore to this interest as well, in most states. The rate depends on where you live. Some states have no income tax at all; others tax interest at rates between 3 and 13 percent.

Key Takeaways

  • Interest from a high-yield savings account is taxed as ordinary income at your federal tax bracket, not at a capital gains rate.
  • Your bank reports the interest on Form 1099-INT, which you receive in January and must report on your tax return.
  • State and local income taxes explore to savings interest in most states, and the rate varies by location.
  • You owe tax on the interest even if you do not withdraw it — the tax is due based on the year you earned it, not when you take the money out.
  • If you earn less than a certain threshold, you may not owe federal tax, but the threshold is low and most account holders exceed it.

How the tax gets calculated and reported

The IRS considers interest income in the year you earn it, not in the year you withdraw it. If your account earns $300 in interest during 2024, you owe tax on that $300 in the 2024 tax year, even if the money stays in the account.

Your bank calculates interest daily or monthly depending on the account terms, but they report the total on Form 1099-INT. This form arrives by January 31 of the following year. You then enter this amount on Schedule B (Interest and Ordinary Dividends) of your Form 1040 tax return.

If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add all the interest together on your return. If the total interest from all sources is under $1,500, you can report it directly on Form 1040 without filing Schedule B, though the result is the same.

Your tax bracket determines the actual tax rate

The federal tax rate on savings interest depends on your total income and filing status. For 2024, federal tax brackets range from 10 percent to 37 percent. If you are in the 22 percent bracket, you pay 22 cents in federal tax for every dollar of interest earned. If you are in the 35 percent bracket, you pay 35 cents per dollar.

Your tax bracket is determined by your total taxable income — wages, self-employment income, interest, dividends, and other sources combined. Adding $500 in interest income might push you into a higher bracket, or it might not, depending on where you already fall.

This is different from capital gains, which have their own lower tax rates in some cases. Interest is always taxed as ordinary income, at your regular bracket rate.

State and local taxes on savings interest

Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire and Tennessee tax only interest and dividends, not wages.

In states with income tax, the rate varies. New York charges up to 10.9 percent on top of federal tax. California charges up to 13.3 percent. Some states charge 3 to 5 percent. A few states offer small exemptions for interest income, but these are rare and usually explore only to retirees or very low earners.

If you live in a state with income tax and earn $1,000 in interest, you might owe roughly 22 percent federal plus 5 to 10 percent state, depending on your location and bracket. The exact amount depends on your state's rules.

When you might owe no federal tax on the interest

The standard deduction for 2024 is $14,600 for single filers and $29,200 for married couples filing jointly. If your total taxable income, including interest, is below these amounts, you owe no federal income tax. However, this applies only if you have no other income sources or very minimal ones.

Most people with high-yield savings accounts also have wages or other income that already exceeds the standard deduction. For them, the interest is added on top and taxed at their regular rate. Even if you are retired and have no wages, you would need to earn less than $14,600 total from all sources — interest, Social Security, pensions, and anything else — to owe no federal tax.

State taxes have their own thresholds, usually lower than the federal standard deduction. You may owe state tax even if you owe no federal tax.

How to report interest on your tax return

When you file your federal return, you report the interest amount from your 1099-INT on Schedule B if your total interest and dividends exceed $1,500. If they are $1,500 or less, you can report directly on Form 1040 Line 2b without filing Schedule B.

For state returns, the process varies by state. Most states have a line on their income tax form where you report interest income. Some states use the same amount as your federal return; others require you to calculate it separately based on state rules.

Keep your 1099-INT forms and any statements from your bank showing interest earned. You do not send these with your return, but you need them if the IRS asks questions later.

The difference between interest and other account earnings

Interest is straightforward — it is the money the bank pays you for keeping your balance there. Some high-yield savings accounts also offer promotional bonuses when you open an account or meet deposit requirements. These bonuses are also taxable as interest income and appear on your 1099-INT.

If you earn interest in a tax-advantaged account like a Roth IRA or traditional IRA, the rules are different. Interest earned inside these accounts is not reported on a 1099-INT and does not trigger a tax bill in the year it is earned. The tax treatment depends on the account type and when you withdraw the money.

Regular taxable savings accounts — including high-yield savings accounts — do not have this protection. All interest is taxable in the year earned.

Frequently Asked Questions

Do I have to pay taxes on interest if I do not withdraw the money?

Yes. The IRS taxes interest in the year you earn it, regardless of whether you withdraw it. If your account earns $200 in interest during 2024 and you leave it in the account, you still owe tax on that $200 in the 2024 tax year.

What if I earned less than $100 in interest — do I still have to report it?

You still owe tax on it, but your bank may not send a 1099-INT if the amount is very small. Banks are required to send a 1099-INT only if interest exceeds $10. If you earned interest below that threshold, you still need to report it on your return if you file one.

Can I deduct any expenses related to my savings account?

No. Interest income is reported as-is with no deductions. Account fees, if you pay any, are not deductible against the interest you earn. You report the gross interest amount on your return.

Is the interest taxed differently if I have multiple accounts at the same bank?

No. Your bank combines all interest from all your accounts with them and reports the total on a single 1099-INT. If you have accounts at multiple banks, each bank sends its own form, and you add them all together on your return.

What happens if my bank sends me a 1099-INT with the wrong amount?

Contact your bank and ask them to issue a corrected form (Form 1099-INT with a corrected box). They will send the corrected version to you and the IRS. You then file an amended return if necessary to match the corrected amount.