Interest from high yield savings accounts is taxable income

Yes. Any interest your high yield savings account earns counts as taxable income on your federal tax return. The IRS treats it the same way it treats interest from a regular savings account, money market account, or certificate of deposit — as ordinary income, taxed at your regular income tax rate.

The bank or financial institution holding your account will send you a Form 1099-INT each January for the previous year if you earned $10 or more in interest. You report that amount on your tax return, and you owe federal income tax on it. Some states also tax interest income, depending on where you live.

This applies even if you never withdrew the money. The IRS taxes the interest in the year you earned it, whether you spent it, left it in the account, or transferred it elsewhere.

Key Takeaways

  • Interest earned on a high yield savings account is ordinary income and taxed at your federal income tax rate, not at a lower capital gains rate.
  • Your bank sends you a Form 1099-INT in January if you earned $10 or more in interest during the previous year, and you must report this on your tax return.
  • State income tax on interest varies by state; some states do not tax interest income, while others tax it at the same rate as federal income.
  • The amount of tax you owe depends on your total income and tax bracket, not on the interest rate the account pays.

How the IRS counts interest as income

The IRS considers interest accrued income — meaning you owe tax on it the moment it is credited to your account, even if you do not touch the money. If your high yield savings account earns $500 in interest during 2024, you report $500 as income on your 2024 tax return, due in April 2025.

Interest is taxed as ordinary income, which means it is added to your wages, self-employment income, and any other income you report. If you earn $60,000 in salary and $500 in interest, the IRS treats you as having earned $60,500. Your tax rate on that interest depends on your tax bracket, not on the interest rate the account pays.

This is different from long-term capital gains, which are taxed at lower rates. Interest is never taxed as a capital gain, no matter how long you hold the account.

When you receive the Form 1099-INT and what to do with it

Your bank or financial institution must send you a Form 1099-INT by January 31 if you earned $10 or more in interest during the calendar year. You will receive one copy in the mail and the IRS receives another copy automatically. The form shows the account number, the financial institution's name, and the total interest earned.

You report the amount shown on the 1099-INT on your tax return. If you use tax software, you enter the amount into the interest income section. If you file by hand, you report it on Schedule B (if you have more than $1,500 in interest income) or directly on Form 1040 (if you have $1,500 or less). The exact form depends on your total interest income and whether you have other investment income.

Keep your 1099-INT with your tax records for at least three years. If the IRS audits you, they will have a copy and will compare it to what you reported.

State income tax on savings account interest

Whether you owe state income tax on interest depends on where you live. Most states that have an income tax tax interest income at the same rate as federal income tax. A few states do not tax interest at all.

The states that do not tax interest income are: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe federal tax on your interest but no state income tax.

If you live in any other state with an income tax, you will owe state tax on the interest as well. Some states allow you to deduct a small amount of interest income (often $100 to $200 per person), but most do not. Check your state's tax authority website or your state tax form to confirm the rules for your state.

How much tax you actually owe on the interest

The amount of tax depends on your tax bracket, not on the interest rate. If you earn $500 in interest and you are in the 22% federal tax bracket, you owe approximately $110 in federal income tax on that interest. If you are in the 12% bracket, you owe approximately $60. If you are in the 37% bracket, you owe approximately $185.

Your tax bracket is determined by your total income — wages, self-employment income, interest, dividends, and other sources combined. Adding $500 in interest may push you into a higher bracket if you are near the edge, but usually it does not. Most people stay in the same bracket.

If you live in a state that taxes interest, add that state's tax rate to the federal amount. For example, if your state taxes interest at 5%, you would owe roughly $25 in state tax on that $500 in interest, plus the federal amount.

Reporting interest if you did not receive a 1099-INT

If you earned less than $10 in interest during the year, your bank is not required to send you a Form 1099-INT. However, you still owe tax on that interest. You must report it on your tax return even if you do not receive a form.

If you earned more than $10 but did not receive a 1099-INT by February 15, contact your bank. Ask them to send you a corrected form or a statement showing the interest earned. If the bank cannot provide it, you can report the interest based on your own records — the account statements you received throughout the year.

If the IRS later receives a 1099-INT from the bank showing interest you did not report, they will contact you about the discrepancy. It is easier to report it correctly the first time.

Interest earned in the year you open or close an account

If you open a high yield savings account partway through the year, you only report the interest earned from the opening date forward. If you close the account partway through the year, you only report interest earned up to the closing date. Your bank will calculate this correctly on the 1099-INT they send you.

If you move money from one bank to another, each bank reports only the interest they paid while the account was open. You may receive two 1099-INT forms in the same year if you had accounts at two different banks. Report both amounts on your tax return.

Frequently Asked Questions

Do I have to pay tax on interest if I reinvest it back into the account?

Yes. The IRS taxes interest in the year you earn it, regardless of what you do with the money. Whether you withdraw it, spend it, or leave it in the account to earn more interest, you owe tax on the original amount earned that year.

What if my high yield savings account earned interest but I closed it before the end of the year?

You still owe tax on all interest earned from January 1 through the date you closed the account. Your bank will report this on the 1099-INT. The closing of the account does not change your tax obligation.

Can I deduct losses from a savings account against the interest income?

No. Savings accounts do not produce losses. You cannot deduct anything against interest income from a savings account. Interest is taxable income with no offsetting deduction.

Is interest from a high yield savings account taxed differently if it is in a retirement account?

Yes. If the high yield savings account is inside a traditional IRA, SEP-IRA, or 401(k), the interest is not taxed in the year it is earned. You pay tax when you withdraw the money in retirement. If it is in a Roth IRA, the interest is never taxed. Regular high yield savings accounts outside retirement accounts are always taxed in the year the interest is earned.

What if I earned interest at multiple banks?

Each bank sends you a separate 1099-INT for the interest they paid. You report the total of all 1099-INT forms on your tax return. The IRS receives copies of all of them, so make sure your total matches.