Interest from a high yield savings account is taxable income
The interest your bank pays you on a high yield savings account counts as ordinary income on your federal tax return. The IRS treats it the same way it treats wages or salary — you owe income tax on the full amount. This applies whether the account is at a traditional bank, an online bank, or a credit union.
Your bank will send you a form called a 1099-INT each January for the previous year if you earned $10 or more in interest. You report the amount shown on that form to the IRS when you file your taxes. Even if you don't receive a 1099-INT because your interest was under $10, you still owe tax on whatever you earned — you just have to track it yourself.
The tax rate you pay depends on your overall income and tax bracket. Someone in a lower tax bracket pays a smaller percentage than someone in a higher one. This is why the same $500 in interest might cost one person $75 in federal tax and another person $150.
Key Takeaways
- Banks report interest earnings of $10 or more on a 1099-INT form sent to you and the IRS in January.
- You owe federal income tax on all interest earned, even amounts under $10 that don't trigger a 1099-INT.
- The tax rate depends on your tax bracket, which is determined by your total income for the year.
- State and local income taxes may also explore to your interest, depending on where you live.
- Interest earned in a high yield savings account is taxed differently than interest in certain retirement accounts like IRAs or 401(k)s.
How the 1099-INT form works
In early January, your bank calculates all the interest you earned during the previous calendar year and reports it on a 1099-INT. The form shows the total interest amount in Box 1. Your bank sends one copy to you and another directly to the IRS, so the IRS already knows about your interest before you file.
You receive the 1099-INT even if you haven't withdrawn the interest — it counts as income whether you took the money out or left it in the account to earn more interest. If you have accounts at multiple banks, you'll receive a separate 1099-INT from each one.
The important date for banks to send you the 1099-INT is January 31. If you don't receive it by early February, contact your bank to request a copy. You'll need it to file your taxes accurately.
Federal tax brackets and what you actually owe
The amount of tax you pay on your interest depends on which tax bracket you fall into. Tax brackets are income ranges, and each range has a different tax rate. For 2024, federal tax brackets range from 10% for the lowest earners to 37% for the highest.
Here's a simplified example: if you're single and earn $35,000 in wages plus $500 in interest, that $500 gets taxed at your marginal rate — the rate that applies to your highest income. It doesn't get taxed at a lower rate just because it's interest. If your total income of $35,500 puts you in the 22% bracket, you owe roughly $110 in federal tax on that $500 (22% of $500).
Tax brackets change each year, and they vary depending on whether you file as single, married filing jointly, head of household, or another status. The IRS publishes updated brackets every year, usually in October for the following year.
State and local taxes on savings interest
Most states tax interest income the same way the federal government does. If your state has an income tax, you'll owe state tax on your savings interest in addition to federal tax. A few states — including Florida, Texas, Wyoming, and South Dakota — have no state income tax at all, so residents there owe only federal tax on interest.
Some states offer tax breaks for certain types of savings or for people over a certain age, but these rarely explore to regular high yield savings accounts. Check your state's tax authority website or speak with a tax preparer if you're unsure whether your state taxes interest income.
A handful of cities also tax income, though this is less common. New York City, for example, taxes interest along with other income. If you live in a city with an income tax, factor that into your total tax burden.
How interest compounds and affects your taxes
High yield savings accounts typically compound interest daily or monthly, meaning the interest you earn gets added to your balance and then earns interest itself. This is good for growing your money, but it means your taxable interest grows faster than it would with straightforward interest.
If you earn $100 in interest in January and leave it in the account, that $100 itself earns interest in February. All of that interest — both the original $100 and the interest it earned — is taxable in the year you earned it. You can't defer the tax by leaving the money in the account.
This is why high yield savings accounts are most useful for money you plan to keep for at least a year. If you move money in and out frequently, you may earn less total interest, which means less tax to pay, but you also miss out on the compounding effect.
Tax-advantaged alternatives to regular savings accounts
If you want to save money without paying tax on the interest each year, certain retirement accounts let you do that. A traditional IRA or 401(k) grows tax-deferred, meaning you don't pay tax on the interest until you withdraw the money in retirement. A Roth IRA grows tax-free, meaning you never pay tax on the interest at all — though you contribute with after-tax dollars.
These accounts have contribution limits and rules about when you can withdraw money without penalty. They're designed for long-term retirement savings, not for money you might need soon. A high yield savings account is still the better choice for an emergency fund or money you plan to use within a few years.
Health Savings Accounts (HSAs) also grow tax-free if you use the money for may have access to medical expenses. If you have access to an HSA through your employer's health plan, it can be a powerful tool for saving on both taxes and healthcare costs.
Tracking interest across multiple accounts
If you have high yield savings accounts at more than one bank, each bank sends its own 1099-INT. You'll need to add up all the interest from all your accounts and report the total on your tax return. Keep copies of all your 1099-INT forms together so you don't miss any.
Some people use a straightforward spreadsheet to track interest throughout the year, especially if they move money between accounts or open new accounts. This makes it easier to spot errors when the 1099-INT arrives and to prepare for taxes.
If you notice a discrepancy between what you calculated and what the 1099-INT says, contact your bank right away. Banks sometimes make mistakes, and it's easier to correct them in January than to deal with the IRS later.
Frequently Asked Questions
Do I owe taxes on interest if I earned less than $10?
Yes. The $10 threshold only determines whether your bank sends you a 1099-INT form. You still owe tax on any interest you earned, even $1 or $5. You'll need to report it yourself on your tax return.
What if I withdraw my interest before the end of the year?
It doesn't matter. You owe tax on interest in the year you earned it, not the year you withdrew it. If you earned $500 in interest by December 31, you owe tax on that $500 even if you don't touch the account until January.
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 itself. You report the interest amount, and the tax is calculated based on your bracket. You can't reduce it by claiming it as a deduction.
Is interest taxed differently if I'm retired?
No, the tax treatment is the same. However, if you're over 65, you may be able to claim an additional standard deduction, which could reduce your overall tax. Talk to a tax preparer about whether this applies to you.
What happens if my bank doesn't send me a 1099-INT?
Contact your bank and request one. If they say you earned less than $10 and won't issue a form, you still need to report the interest on your tax return. Keep your account statements as proof of what you earned.