The IRS taxes interest earned in high-yield savings accounts as ordinary income
Yes. Any interest your high-yield savings account earns is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on the full amount, at your regular tax rate. If you earn $500 in interest over a year, that $500 counts as income on your tax return.
This applies to every type of savings account that earns interest: high-yield savings, money market accounts, certificates of deposit (CDs), and regular savings accounts. The rate of interest does not matter. A high-yield account earning 4.5% is taxed the same way as a traditional bank account earning 0.01%. The difference is just how much interest you earn — and therefore how much tax you owe.
Your bank or financial institution will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. This form reports the interest to both you and the IRS. You then report that amount on your federal tax return, usually on Schedule 1 (Form 1040) or directly on Form 1040 itself, depending on your situation.
Key Takeaways
- Interest earned in any savings account is taxed as ordinary income at your federal tax rate, regardless of how much interest the account earns.
- Your bank sends you Form 1099-INT if you earned $10 or more in interest during the year, and you must report this on your tax return.
- State and local income taxes also explore to savings interest in most states, so your total tax burden depends on where you live.
- The interest is taxed in the year it is earned, even if you do not withdraw the money from the account.
How the IRS knows about your interest income
Banks report interest to the IRS automatically through Form 1099-INT. You receive a copy, the IRS receives a copy, and they match them during processing. If you do not report the interest on your return and the IRS sees it on the 1099-INT, you will receive a notice asking why the amounts do not match.
The $10 threshold means that if you earn less than $10 in a year, your bank does not have to send you a 1099-INT and does not report it to the IRS. However, you are still technically required to report it if you file a return. In practice, amounts under $10 rarely trigger IRS action, but the obligation exists.
If you have multiple savings accounts at different banks, each one sends its own 1099-INT. You add all of them together when you report your total interest income on your return.
State and local taxes on savings interest
Federal income tax is not the only tax that applies. Most states also tax interest income at their state income tax rate. If you live in a state with income tax, you will owe state tax on your savings interest in addition to federal tax.
A few states do not have income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe only federal tax on your interest. New Hampshire and Tennessee tax only interest and dividend income, not wages, so the rules differ slightly there.
Some cities and counties also impose local income taxes. New York City, for example, taxes interest income. You would owe federal tax, New York State tax, and New York City tax on the same interest. Your total tax rate depends on all three.
When interest is taxed versus when you receive it
Interest is taxed in the year it is earned, not the year you withdraw it. If your account earns $300 in interest during 2024, you owe tax on that $300 in 2024, even if you leave the money in the account and do not touch it until 2025. The IRS taxes the income when it is credited to your account, not when you move the money.
This matters if you are planning to withdraw money later. The interest has already been taxed, so when you withdraw the principal plus interest, you do not pay tax again on the interest portion. You only pay tax once, in the year it was earned.
How much tax you actually owe on interest
Your tax rate on interest depends on your total income and your tax bracket. Interest is taxed as ordinary income, which means it is added to your wages, self-employment income, and other income sources, and then taxed at whatever rate applies to your total.
If you earn $50,000 in wages and $500 in interest, your taxable income is $50,500. That $500 is taxed at whatever marginal rate applies to the top of your income — not at a special rate for interest. For 2024, if you are single, that could be 12%, 22%, or higher, depending on your total income.
This is different from long-term capital gains, which have preferential tax rates. Interest income does not get that break. It is taxed like ordinary income.
Strategies people use to reduce interest income taxes
You cannot avoid the tax, but some people structure their savings to reduce the amount of interest they earn in a taxable account. One common approach is to use a Roth IRA or other retirement account, where interest grows tax-free. However, these accounts have contribution limits and withdrawal rules, so they are not a replacement for regular savings.
Another approach is to keep money in a regular savings account or money market fund that earns less interest, though this costs you money in foregone interest. The tax savings are usually smaller than the interest you lose.
Some people hold savings in Treasury bills or I Bonds, which are exempt from state and local income tax (though not federal tax). This only helps if you live in a high-tax state. The interest rates on these instruments are often lower than high-yield savings accounts, so the tax savings may not outweigh the lower return.
What to do when you receive your 1099-INT
When your 1099-INT arrives, check it for accuracy. Make sure the interest amount matches what you see in your account statements. If there is a discrepancy, contact your bank and ask them to issue a corrected form.
Keep the 1099-INT with your tax records. When you file your return, report the interest amount on the appropriate line. If you use tax software, it usually walks you through where to enter it. If you file by hand or with a tax professional, give them the 1099-INT.
You do not need to attach the 1099-INT to your return, but you should keep it for your records in case the IRS ever asks questions about your income.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Technically yes, but your bank does not report it to the IRS, and the IRS rarely pursues amounts under $10. If you file a return, you can include it, but many people do not bother. The safest approach is to report it.
What if I move money between my own savings accounts — is that taxed?
No. Moving money between accounts you own is not a taxable event. Only the interest earned is taxed. Transfers of principal do not create tax liability.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. Fees are not deductible against interest income. However, some fees may be deductible as miscellaneous expenses if you itemize deductions, though rules vary.
Is interest from a joint savings account split between owners for tax purposes?
Not automatically. The bank reports the full interest amount to the IRS under whoever's Social Security number is listed as the primary account holder. You and the other owner must decide how to split the tax liability between you, usually based on who contributed the money or your ownership agreement.
Do I owe taxes on interest if I close the account mid-year?
Yes. You owe tax on all interest earned in that calendar year, whether the account is open or closed at tax time. The bank still sends a 1099-INT for the interest earned before you closed it.