The IRS taxes interest from high yield savings accounts as ordinary income

Interest earned in a high yield savings account is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on every dollar of interest your account earns, at your regular tax rate. If you earn $500 in interest over a year and you're in the 22% tax bracket, you'll owe roughly $110 in federal tax on that interest alone.

Your bank reports this interest to the IRS on a 1099-INT form each January. You receive a copy, and the IRS receives a copy. If you don't report the interest on your tax return, the IRS will notice the mismatch between what your bank reported and what you claimed.

State and local taxes apply too. Most states tax interest income at your regular state income tax rate. Some states — like Florida, Texas, and Wyoming — don't have state income tax at all, so residents there owe only federal tax. Others tax interest at a flat rate or a graduated rate depending on your total income.

Key Takeaways

  • Interest from high yield savings accounts is reported to the IRS on Form 1099-INT and must be included on your federal tax return.
  • You pay tax on the interest at your ordinary income tax rate, which varies based on your total income and filing status.
  • State and local income taxes apply to savings account interest in most states, though a handful of states have no income tax.
  • The bank sends you a 1099-INT by January 31 each year; if you don't receive one by early February, contact the bank to request it.

How the 1099-INT form works and when you receive it

Banks and financial institutions are required to send you a Form 1099-INT if you earned $10 or more in interest during the calendar year. You'll receive it by January 31 of the following year. The form shows the total interest your account earned, broken down by type (ordinary interest, U.S. savings bond interest, and so on).

You receive two copies: one to keep for your records, and one to file with your tax return. The bank also sends a copy directly to the IRS. When you file your taxes, you report the interest amount from the 1099-INT on your Form 1040 (the main federal income tax form) or on Schedule B if you have multiple accounts or other investment income.

If you earned less than $10 in interest, the bank may not send a 1099-INT, but you still owe tax on that interest. You'll need to track it yourself and report it on your return.

What tax bracket your interest falls into

Interest income is taxed at your marginal tax rate — the tax rate that applies to your highest dollar of income. If you earn $60,000 in salary and $500 in interest, that $500 is taxed at whatever bracket your $60,500 total income puts you in, not at a lower rate.

Federal tax brackets change each year and depend on your filing status (single, married filing jointly, head of household, and so on). For 2024, a single filer in the 22% bracket earns between roughly $11,600 and $47,150. A married couple filing jointly in the 22% bracket earns between roughly $23,200 and $94,300. The IRS publishes updated brackets each January.

This means the tax cost of your interest varies depending on your total income for the year. Someone earning $30,000 a year pays less tax on $500 of interest than someone earning $150,000 a year, because they're in a lower bracket.

State and local taxes on savings account interest

Most states tax interest income at your regular state income tax rate. If your state has a 5% income tax and you earn $500 in interest, you'll owe $25 in state tax on top of your federal tax.

Nine states have no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividend income, but many high yield savings accounts fall outside that definition). Residents of these states owe only federal tax on savings account interest.

Some states offer tax breaks for certain types of savings. A few states exempt interest earned in dedicated savings accounts for specific purposes — education, disability, or medical expenses — but these are rare and have strict rules about how the money can be used. A standard high yield savings account does not may have access to for these exemptions.

If you live in a city or county with local income tax (common in Ohio, Pennsylvania, and parts of New York), that tax applies to your interest income too. Your employer usually withholds local tax from your paycheck, but you may need to account for interest income separately when you file.

How much tax you'll actually owe on your interest

The tax you owe depends on three things: how much interest you earned, your tax bracket, and whether your state taxes interest income.

A concrete example: suppose you earned $1,000 in interest, you're single and in the 24% federal tax bracket, and you live in a state with a 5% income tax. Your federal tax on that interest is $240. Your state tax is $50. Your total tax bill is $290, leaving you with $710 of the original $1,000.

If you live in a state with no income tax, you'd owe only the $240 federal tax, leaving you with $760. If you're in a lower federal bracket — say, 12% — and the same 5% state tax, you'd owe $170 total, leaving you with $830.

High yield savings accounts currently pay between 4% and 5.35% APY depending on the bank and account type. On a $10,000 balance earning 5% APY, you'd earn roughly $500 in interest over a year. In the 24% federal bracket plus 5% state tax, you'd owe about $145 in tax.

What happens if you don't report the interest

The IRS matches the 1099-INT your bank sends to your tax return. If you don't report the interest, the IRS will notice the discrepancy and send you a notice. You'll owe the tax you didn't pay, plus interest on the unpaid tax (currently around 8% per year), plus a penalty for underpayment.

The penalty for not reporting income is usually 20% of the unpaid tax, though it can be higher if the IRS determines the underreporting was intentional. On $500 of unreported interest in the 24% bracket, you'd owe $120 in tax, plus roughly $10 in interest (depending on how long it took to catch), plus $24 in penalty — a total of $154 instead of the original $120.

Reporting the interest costs you nothing extra. You simply include the 1099-INT amount on your tax return. It's far cheaper than dealing with an IRS notice later.

Whether you should move money out of high yield savings to avoid taxes

The tax on interest is real, but it doesn't make high yield savings accounts a bad choice. The interest rate is what matters. A high yield savings account paying 5% APY, minus taxes, still leaves you with more money than a regular savings account paying 0.01% APY, even after you pay tax on the 5%.

If you're in the 24% federal bracket plus 5% state tax, 5% APY becomes roughly 3.5% after tax. A regular savings account paying 0.01% becomes 0.007% after tax. You're still far ahead with the high yield account.

The only reason to move money out of a high yield savings account is if you need it for something else or if you find a different account with a higher rate. Tax alone is not a reason to accept a lower interest rate.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

Yes. The bank doesn't have to send you a 1099-INT if you earned less than $10, but you still owe tax on that interest. You'll need to track it yourself and report it on your tax return. The IRS doesn't have a minimum threshold for taxable interest income.

Can I deduct anything to offset the tax on my savings interest?

No. Interest income is ordinary income, and there's no deduction that applies to it. You can't reduce the taxable interest by claiming a deduction. However, if you have investment losses or certain other deductions, those might lower your overall taxable income, which would lower your tax bracket and reduce the tax on your interest indirectly.

What if I have multiple high yield savings accounts at different banks?

Each bank sends you a separate 1099-INT for the interest earned in that account. You report all of them on your tax return. The total interest across all accounts is what matters for tax purposes — there's no limit on how many accounts you can have.

Does interest earned in a Roth IRA or 401(k) get taxed?

No. Interest earned inside a Roth IRA, traditional IRA, or 401(k) is not taxed in the year it's earned. That's the main tax advantage of these retirement accounts. You only pay tax when you withdraw the money in retirement (or in the case of a Roth, you may not pay tax at all). A high yield savings account outside a retirement account is always taxable.