High yield savings accounts are taxed like any other interest income

Yes, you owe federal income tax on the interest your high yield savings account earns. The bank or credit union reports that interest to the IRS on a 1099-INT form, and you report it on your tax return. The interest counts as ordinary income, taxed at your regular income tax rate—not at a lower capital gains rate.

The amount you owe depends on how much interest you earned and your tax bracket. If you earned $100 in interest and you're in the 22% tax bracket, you owe roughly $22 in federal tax on that interest. Some states also tax interest income, so your total tax bill may be higher.

The bank does not withhold tax automatically from high yield savings accounts the way it does from some other accounts. You are responsible for setting aside money to pay the tax when it's due, or you can adjust your withholding if you have a job.

Key Takeaways

  • Interest earned in a high yield savings account is taxed as ordinary income at your federal tax rate, and you report it on your tax return using the 1099-INT form the bank sends you.
  • Your state may also tax the interest, depending on where you live and whether your state has an income tax.
  • The bank does not automatically withhold tax from high yield savings interest, so you need to plan to pay the tax yourself or adjust your job withholding.
  • The more interest you earn, the higher your tax bill—there is no threshold below which interest becomes tax-free.
  • Tax-advantaged accounts like IRAs and 529 plans can hold high yield savings without triggering annual tax on the interest.

How the IRS finds out about your interest

Banks and credit unions are required to report interest paid to you on a Form 1099-INT. They send a copy to you and a copy to the IRS. If you earned more than $10 in interest during the year, the bank must issue a 1099-INT; some banks issue them for any amount over $1.

The IRS matches the 1099-INT against your tax return. If you don't report the interest, the IRS will notice the discrepancy. Failing to report interest income can result in penalties and interest charges on the unpaid tax.

You receive the 1099-INT by January 31 of the year following the one in which you earned the interest. If you earned interest in 2024, you'll get the form in January 2025.

Federal tax rates on interest income

Interest is taxed at your marginal tax rate—the rate that applies to your highest dollar of income. In 2024, federal tax brackets range from 10% to 37%, depending on your income and filing status. If you're single and earn $47,000, you're in the 22% bracket, so interest you earn is taxed at 22%.

The tax brackets change each year. The IRS adjusts them for inflation, so the income thresholds that put you in each bracket shift annually. You can find the current brackets on the IRS website or on your tax software.

Interest income is added to your other income for the year. If you have a job, freelance income, and high yield savings interest, all three are added together to determine your total income and your tax bracket.

State income tax on savings interest

Most states with an income tax also tax interest income at rates ranging from roughly 1% to 13%, depending on the state. A few states—including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—do not have a state income tax at all, so residents pay no state tax on interest.

Some states offer limited exemptions. Illinois, for example, does not tax interest income from savings accounts, money market accounts, or CDs. A few other states exempt interest earned by residents over a certain age. Check your state's tax authority website or your state's tax form instructions to see whether your state taxes savings interest.

If you live in a state with income tax and earn interest in a high yield savings account, you typically report that interest on your state tax return as well as your federal return.

When you owe the tax and how to pay it

You owe federal income tax on interest in the year you earn it, even if the bank doesn't withhold it. Tax is due on April 15 of the following year (or the next business day if April 15 falls on a weekend or holiday).

If you expect to owe $1,000 or more in tax for the year and you don't have enough withheld from a job, you may need to make estimated tax payments quarterly. These are due on April 15, June 15, September 15, and January 15. If you miss a payment, you may owe a penalty even if you pay the full amount by April 15.

Most people handle this by filing their tax return on time and paying any balance due. If you use tax software or a tax preparer, they will calculate the tax on your interest and tell you what you owe.

Using tax-advantaged accounts to avoid annual tax on interest

If you want to earn high yield savings interest without paying tax on it each year, you can hold a high yield savings account inside a traditional IRA or Roth IRA. Interest earned inside an IRA is not taxed annually; instead, you pay tax when you withdraw the money (in a traditional IRA) or not at all (in a Roth IRA, if you follow the rules).

A 529 education savings plan also allows interest to grow tax-free if the money is used for may have access to education expenses. Some states offer additional tax deductions for 529 contributions.

These accounts have contribution limits and withdrawal rules, so they work best if you have a specific goal—retirement or education—and can leave the money untouched for years. For money you need to access sooner, a regular high yield savings account is more flexible, even though you'll owe tax on the interest.

Reporting interest on your tax return

When you file your federal tax return, you report interest income on Schedule B (if you have more than $1,500 in interest and dividends) or directly on Form 1040 (if you have $1,500 or less). You list each account and the amount of interest earned, then add them up and enter the total on your return.

If you use tax software, it will walk you through entering the 1099-INT information. The software calculates the tax you owe based on your total income and filing status. If you use a tax preparer, bring your 1099-INT forms with you.

For state taxes, you typically report interest on your state income tax return in a similar way. Some states have their own schedules; others let you report it directly on the main form.

Frequently Asked Questions

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

Banks don't have to issue a 1099-INT for interest under $10, but you still owe tax on it. If you earned $5 in interest, you should report it on your tax return. The IRS may not catch it, but failing to report is technically tax evasion.

What if I earned interest in multiple high yield savings accounts?

You'll receive a separate 1099-INT from each bank. Add up all the interest from all your accounts and report the total on your tax return. The IRS receives copies of all the 1099-INTs, so they know your total interest income.

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

You cannot deduct the interest you earn. However, if you have investment expenses or losses, you may be able to deduct those. Most people cannot deduct interest paid on personal loans or credit cards, but interest on loans used to buy investments may be deductible in some cases. Consult a tax preparer about your specific situation.

Do I owe tax on interest if I move to a different state?

You owe tax to the state where you lived when you earned the interest. If you earned interest while living in New York and then moved to Florida, you report that interest on your New York return for the year you earned it. You don't owe Florida tax on it because Florida has no income tax.

What happens if the bank sends me a 1099-INT with the wrong amount?

Contact the bank immediately and ask them to issue a corrected form. Once corrected, the bank will send the corrected 1099-INT to you and the IRS. If you already filed your return with the wrong amount, you can file an amended return (Form 1040-X) once you have the corrected 1099-INT.