The IRS counts your savings interest as income
Yes, the interest your high-yield savings account earns is taxable. The IRS treats it as ordinary income, the same way it treats wages from a job. If your account earns $50 in interest over a year, that $50 counts as income you owe tax on.
This surprises many people because the interest feels small — often just a few dollars a month. But the IRS does not have a minimum threshold. Even $1 in interest is technically taxable income. In practice, you only report it if your total interest income crosses certain thresholds, which we'll cover below.
The bank or financial institution holding your account will track this and send you a form at tax time. You do not have to calculate it yourself or guess.
Key Takeaways
- Interest earned in a high-yield savings account counts as ordinary income and is subject to federal income tax.
- Banks send you a Form 1099-INT each January reporting interest of $10 or more, though you may owe tax on smaller amounts depending on your situation.
- The amount of tax you owe depends on your overall income and tax bracket, not on the interest amount alone.
- You report this interest on your federal tax return, and some states also tax interest income while others do not.
How banks report your interest to the IRS
In January of each year, your bank will send you a Form 1099-INT if you earned $10 or more in interest during the previous calendar year. This form lists all the interest your account generated. The bank sends a copy to you and a copy to the IRS.
If you earned less than $10, the bank typically does not send a 1099-INT, but you may still owe tax on that interest depending on your age and filing status. Older adults have higher thresholds before they must file a return at all.
Keep this form with your tax records. You will need it when you file your federal return, usually by April 15.
What tax rate applies to your interest
The tax you owe on savings interest depends on your overall income and which tax bracket you fall into — not on the interest amount by itself. If you earn $30,000 a year and your savings account generates $200 in interest, that $200 gets added to your $30,000, making your taxable income $30,200. You then pay tax on the full amount at your bracket's rate.
For 2024, federal tax brackets range from 10% to 37%, depending on how much total income you have. Someone in the 22% bracket pays roughly 22 cents in federal tax for every dollar of interest earned. Someone in the 12% bracket pays roughly 12 cents per dollar.
This is why high-yield savings accounts are most useful for people in lower tax brackets. The interest you earn is real money, but a portion of it goes to taxes.
State and local taxes on savings interest
Most states also tax interest income, though the rate varies widely. Some states tax it at the same rate as federal income tax. Others tax it at a lower rate or not at all.
States with no income tax — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax savings interest. If you live in one of these states, you only owe federal tax on your interest.
If you live in a state with income tax, check your state's tax agency website or ask a tax preparer what rate applies to interest income in your state. Some states have special rules for retirees or people over a certain age.
When you must report interest under $10
Even if your bank does not send you a 1099-INT because your interest was under $10, you may still need to report it. The rule depends on your age and filing status.
If you are under 65 and single, you must file a federal return if your gross income is $13,850 or more (for 2023). If you are 65 or older and single, the threshold is $15,450. Married couples filing jointly have higher thresholds. If your total income — including that small amount of interest — crosses your threshold, you file a return and report all interest earned, even if it was $2.
The thresholds change each year. Check the IRS website or ask a tax preparer what applies to your situation.
How to reduce taxes on savings interest
You cannot avoid the tax, but you can reduce the amount of interest you earn and therefore the tax owed. This sounds backwards, but it matters in specific situations.
If you are close to a tax bracket threshold or a benefit threshold (like Medicare premium calculations), earning extra interest could push you over and cost you more in taxes or lost benefits than the interest is worth. In that case, keeping some money in a regular savings account with lower interest might actually leave you with more money after taxes.
For most people, though, a high-yield account still comes out ahead. Even after taxes, the interest you earn is more than you would earn in a regular savings account. A regular account might pay 0.01% interest while a high-yield account pays 4% or 5%. After taxes, you still come out significantly ahead.
The other option is to hold money in a Roth IRA or other retirement account, where interest and growth are not taxed as you earn them. But these accounts have contribution limits and rules about when you can withdraw money.
Frequently Asked Questions
Do I have to pay taxes on interest if I only earned $5?
Technically yes, but whether you must file a return depends on your total income and age. If your total income is below your filing threshold, you do not have to file. If you do file for other reasons, you report all interest earned. Check the IRS thresholds for your age and filing status.
What if I move money between accounts during the year?
Moving money does not create taxable income. Only the interest the bank pays you is taxable. If you transfer $5,000 from one account to another, that $5,000 is not income. The interest that account earns is.
Can I deduct any expenses against my savings interest?
No. Interest income is reported as-is. You cannot deduct account fees or other costs against it. If your account charges a $5 monthly fee and earns $10 in interest, you report $10 as income and pay the fee separately.
Do I owe taxes on interest if I am a dependent?
Yes, but the filing threshold is lower for dependents. A dependent under 65 must file if they have unearned income (like interest) of $1,150 or more. Ask the person claiming you as a dependent or check the IRS website for the current year's threshold.
What happens if I do not report the interest?
The IRS receives a copy of your 1099-INT from the bank. If you do not report it and your income is high enough that you should have filed, the IRS will likely notice the discrepancy and contact you. Penalties and interest on unpaid taxes can add up quickly, so it is better to report it.