The IRS taxes your high yield savings interest as ordinary income
Interest earned in a high yield savings account is taxed by the federal government at your regular income tax rate, not at a lower capital gains rate. If you earn $500 in interest and you're in the 22% tax bracket, you owe roughly $110 in federal tax on that interest. The bank doesn't automatically withhold this tax—you report it yourself when you file your tax return.
Your state may also tax this interest, depending on where you live. Nine states have no income tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire), so residents there owe only federal tax. Other states tax interest at their regular income tax rate, which ranges from less than 1% to over 13% depending on the state and your income level.
The tax is due on the interest you actually earned during the year, whether or not you withdrew it. If you earned $200 in interest but left it in the account, you still owe tax on that $200.
Key Takeaways
- Interest from a high yield savings account is taxed as ordinary income at your federal tax rate, not as investment income at a lower rate.
- You report the interest on your tax return; the bank does not automatically withhold the tax, though some banks may withhold if you request it.
- State income tax applies to savings interest in 41 states, with rates varying from under 1% to over 13% depending on your state and income.
- The IRS requires banks to report interest of $10 or more on a Form 1099-INT, which you receive by January 31 each year.
- You owe tax on interest earned during the year even if you do not withdraw the money.
How the IRS finds out about your interest income
Banks report interest paid to you on a Form 1099-INT, which they send to you and to the IRS by January 31 each year. If you earned $10 or more in interest during the year, the bank must file this form. The IRS matches the 1099-INT they receive from the bank against the interest income you report on your tax return, so underreporting or forgetting to report it creates a mismatch the IRS will catch.
You receive a copy of the 1099-INT in the mail or electronically through your bank's website. The form shows the account number, the amount of interest paid, and the bank's name and tax ID. Keep this form with your tax records.
What tax bracket your interest falls into
Interest income is added to your other income (wages, self-employment income, capital gains, and so on) to determine your total taxable income for the year. Your total income then determines which tax bracket you fall into, and that bracket is the rate at which your interest is taxed.
For example, if you earn $50,000 in wages and $500 in interest, your taxable income is $50,500. That $500 in interest is taxed at whatever rate applies to the top portion of your income. In 2024, if you're single, the 22% federal bracket covers income from roughly $11,600 to $47,150, and the 24% bracket covers $47,150 to $100,525. So that extra $500 in interest would be taxed at 24%, not 22%.
This is why the actual tax you owe on interest depends on your total income, not just the interest amount. A person earning $30,000 a year pays less tax on $500 in interest than a person earning $150,000 a year.
The difference between federal and state tax on savings interest
Federal tax is owed to the IRS and is the same rate for all Americans in the same tax bracket. State tax is owed to your state government and varies widely. The table below shows which states have no income tax and which tax savings interest at their regular rate:
| No State Income Tax | State Income Tax on Interest (Regular Rate) |
|---|---|
| Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, New Hampshire | All other states tax interest at their ordinary income rate, ranging from under 1% (Louisiana) to over 13% (California, Hawaii, New York) |
If you live in a state with income tax, you report the same interest income on your state tax return as you do on your federal return. Some states allow deductions or credits that reduce the tax owed on interest, but most do not.
Whether the bank withholds tax from your interest
Banks do not automatically withhold federal or state income tax from interest they pay you. The interest is deposited into your account in full, and you are responsible for setting aside money to pay the tax when you file your return.
You can request that your bank withhold tax if you want to, though few people do. If you ask the bank to withhold, they will reduce the interest deposited to your account and send that amount to the IRS on your behalf. This is optional and requires you to fill out a form with the bank. Most people skip this step and simply pay the tax when they file their return.
How to report savings interest on your tax return
You report interest income on Schedule B (Interest and Ordinary Dividends) if you use the long form (Form 1040), or on the simpler Form 1040 itself if your interest is under $1,500 and you have no other investment income. You enter the total interest from all your accounts, including the high yield savings account.
The interest amount comes from the 1099-INT forms you receive from each bank. If you have multiple savings accounts at different banks, each bank sends a separate 1099-INT, and you add them all together on your tax return.
If you use tax software (TurboTax, H&R Block, TaxAct, or similar), the software walks you through entering this information and automatically places it in the correct spot on your return. If you file by hand or with a tax professional, bring all your 1099-INT forms with you.
Tax-advantaged alternatives to regular high yield savings
If you want to earn interest while reducing or deferring taxes, a few options exist, though they come with trade-offs:
Individual Retirement Accounts (IRAs) allow you to earn interest tax-free (in a Roth IRA) or tax-deferred (in a traditional IRA), but you cannot withdraw the money before age 59½ without penalty. A Roth IRA is funded with after-tax money, so you pay tax on the contribution but not on the interest. A traditional IRA lets you deduct the contribution from your taxable income in the year you make it, but you pay tax on withdrawals later.
Certificates of Deposit (CDs) in an IRA follow the same tax rules as the IRA itself—tax-free growth in a Roth, tax-deferred in a traditional. Outside an IRA, CD interest is taxed the same way as savings interest.
Series I Savings Bonds issued by the U.S. Treasury earn interest that is exempt from state and local tax. Federal tax is deferred until you cash the bond or it matures (up to 30 years), and you can avoid federal tax entirely if you use the proceeds to pay for education. However, these bonds have strict rules: you must hold them at least one year, and if you cash them before five years, you lose the last three months of interest.
Frequently Asked Questions
Do I have to pay tax on interest if I earned less than $10?
The bank does not have to send you a 1099-INT if you earned less than $10, but you still owe tax on that interest. You report it on your tax return based on your own records or your account statements. The IRS expects you to report all interest income, regardless of amount.
What if I earned interest but didn't withdraw it?
You owe tax on interest in the year it was earned, even if it stayed in the account. The tax is based on the interest credited to your account, not on money you actually took out. This is true for all interest income.
Can I deduct losses from a savings account against the interest I earned?
No. Savings accounts do not generate losses—they either earn interest or earn nothing. You cannot deduct account fees or foregone interest against interest income. Interest is reported as income with no offsetting deductions.
Do I report interest from multiple banks separately?
No. You add up all the interest from all your accounts and report the total on your tax return. Each bank sends a 1099-INT, but you combine them into one line item on Schedule B or Form 1040.
What happens if the bank reports the wrong amount of interest on the 1099-INT?
Contact the bank immediately and ask them to issue a corrected 1099-INT (marked as a correction). They will send the corrected form to you and to the IRS. You then report the correct amount on your tax return. Keep both the original and corrected forms for your records.