Interest from a high-yield savings account is taxed as ordinary income at your federal tax rate, plus state and local income tax if your state has them.
The bank or credit union holding your account will send you a 1099-INT form each January for any interest you earned the previous year. You report that amount on your federal tax return (Form 1040) as interest income. The IRS taxes it the same way it taxes wages or salary — at whatever your marginal tax bracket is. If you earned $500 in interest and you're in the 22% federal tax bracket, you owe roughly $110 in federal tax on that interest alone.
State and local income tax applies too, depending on where you live. If your state has an income tax (most do), you'll owe tax on the interest there as well. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax, so residents of those states owe only federal tax on savings interest. New Hampshire and Tennessee tax only interest and dividend income, not wages.
The tax is due when you file your annual return, typically by April 15. You don't pay it when the interest hits your account — the bank doesn't withhold it automatically the way an employer withholds payroll tax. That means you're responsible for setting aside money to cover the tax bill yourself.
Key Takeaways
- Interest earned in a high-yield savings account is taxed as ordinary income at your federal tax bracket, plus state and local income tax if applicable.
- Banks send a 1099-INT form each January reporting the previous year's interest, which you report on your federal tax return.
- No tax is withheld automatically from the interest, so you must plan to pay the tax when you file your return or make quarterly estimated payments if the interest is substantial.
- Eight states have no income tax, and two others tax only interest and dividends, so your state of residence affects the total tax you owe.
- Interest income counts toward your total income for the year, which can affect your may be able to access for certain tax credits and deductions.
When the IRS considers interest income reportable
You must report interest on your tax return if you earned more than $10 in interest during the year. That's the threshold at which banks are required to issue a 1099-INT form. If you earned $8 in interest, the bank won't send you a form, but you're still technically required to report it — the IRS just doesn't expect to see it documented.
Interest compounds daily or monthly depending on the account, so even a modest balance in a high-yield account can cross that $10 threshold quickly. A $5,000 balance earning 4.5% APY generates roughly $225 in annual interest, well above the reporting requirement. A $1,000 balance at the same rate generates $45.
How interest income affects your tax bracket and credits
Interest income counts toward your total income for the year, which can push you into a higher tax bracket or reduce your access to certain tax credits. If you're close to an income threshold for a credit like the Earned Income Tax Credit (EITC) or the American Opportunity Tax Credit, extra interest income could disqualify you or reduce the amount you receive.
For example, if your wages are $30,000 and you earn $2,000 in interest, your total income is $32,000 for tax purposes. That higher total income is what determines your tax bracket and your may be able to access for income-based credits and deductions. The effect is usually small for most savers, but it's worth knowing if you're near a threshold.
Strategies to reduce the tax impact of savings interest
You cannot avoid paying tax on interest income, but you can reduce how much interest you earn in taxable accounts. One approach is to keep money in a regular savings account or money market account earning little to no interest if you expect to need it within a year or two. The tax savings on $50 in foregone interest is minimal, but it's a real choice.
Another option is to hold savings in a Roth IRA or Roth 401(k) if you're saving for retirement. Interest earned inside these accounts is not taxed, and you can withdraw contributions (though not earnings) without penalty if you need the money before retirement age. Contribution limits apply — $7,000 per year for IRAs in 2024, or $23,500 for 401(k)s — so this works only for a portion of your savings.
A 529 college savings plan also grows tax-free if the money is used for may have access to education expenses. Interest earned in a 529 is not taxed at the federal level, and most states don't tax it either, even if they tax other interest income.
For non-retirement savings, there's no legal way to avoid the tax. You earn interest, you report it, you pay tax on it. The rate you pay depends on your tax bracket, not on the interest rate the bank pays you.
What happens if you don't report interest income
The IRS receives a copy of every 1099-INT form the bank sends to you. If you don't report the interest on your tax return, the IRS will notice the discrepancy when it matches your return against the forms it received. The agency will send you a notice and bill you for the unpaid tax, plus interest on the unpaid amount and potentially a penalty for underpayment.
The penalty for failing to report income is typically 20% of the unpaid tax, though it can be lower if you have reasonable cause. Interest accrues daily on the unpaid tax, so the longer you wait to correct it, the more you owe. If the IRS initiates an audit, you may face additional scrutiny of other parts of your return.
How to report interest income on your tax return
When you file your federal return, you'll report interest income on Schedule 1 (Form 1040), which is part of the standard federal tax package. The form asks for your total interest income from all sources — savings accounts, CDs, bonds, and any other interest-bearing accounts. You enter the total from your 1099-INT form (or forms, if you have multiple accounts).
If you file electronically, tax software will walk you through entering the 1099-INT information. If you file by paper, you'll attach a copy of the 1099-INT to your return. Keep your own copy for your records.
State tax returns vary by state, but most ask for the same interest income information. Some states allow you to exclude a small amount of interest income (typically $100 to $200) if you're over a certain age, usually 65. Check your state's tax instructions to see if any exclusions apply to you.
Frequently Asked Questions
Do I have to pay tax on interest if I'm retired?
Yes. Interest income is taxed the same way regardless of your age or employment status. However, if you're 65 or older, you may be able to claim a larger standard deduction, which reduces your taxable income. Some states also offer an exclusion on interest income for seniors, so check your state's rules.
What if I move money between high-yield savings accounts during the year?
Moving money between accounts doesn't change the tax outcome. You owe tax on all interest earned in your name during the year, regardless of which account held the money when the interest was credited. Each bank or credit union reports only the interest earned in its own account, so you may receive multiple 1099-INT forms if you have accounts at different institutions.
Can I deduct losses from a savings account against interest income?
No. Savings accounts don't generate losses — they either earn interest or earn nothing. You can't deduct a loss from a savings account the way you might deduct a capital loss from an investment. Interest income stands on its own and is fully taxable.
Is interest from a joint savings account split between both owners for tax purposes?
Not automatically. The bank reports the total interest to the Social Security number listed as the account owner. If the account is truly joint and both owners contributed equally, you may need to split the interest income between you for tax purposes, but the bank won't do this automatically. Consult a tax professional if you have a joint account and want to split the reported interest.
What if my interest income is very small — do I still have to report it?
If the bank issued a 1099-INT, you should report it. If interest was under $10 and no form was issued, you're not required to report it, though technically the IRS expects all income to be reported. The practical risk of not reporting $5 or $8 in interest is minimal, but the correct answer is to report all income.