High yield savings interest counts as ordinary income on your tax return

Interest earned in a high yield savings account is taxable income. The IRS treats it the same way it treats interest from any other savings account — you report it as ordinary income and pay tax on it at your regular income tax rate, which varies based on your tax bracket.

Your bank or credit union will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. You use this form to report the interest on your federal tax return. Some states also tax savings interest, though the rules vary by state.

The amount you owe in tax depends on how much interest you earned and your overall income for the year. Someone in the 22% tax bracket who earned $500 in interest would owe roughly $110 in federal tax on that interest alone. Someone in the 37% bracket would owe about $185 on the same $500.

Key Takeaways

  • You must report all high yield savings interest on your federal tax return, even if your bank does not send a 1099-INT form.
  • The IRS taxes savings interest at your ordinary income tax rate, which ranges from 10% to 37% depending on your total income and filing status.
  • Your bank sends Form 1099-INT in January if you earned $10 or more in interest during the previous calendar year.
  • Some states tax savings interest and some do not; check your state's rules or ask your tax preparer whether you owe state tax on the interest.

When your bank sends you a 1099-INT form

Banks and credit unions are required to send Form 1099-INT to any account holder who earned $10 or more in interest during the calendar year. The form arrives by January 31 and shows the total interest paid to that account during the previous year.

If you earned less than $10, your bank may not send a 1099-INT, but you still owe tax on the interest. The $10 threshold is a reporting requirement, not a tax threshold. You must report all interest income, regardless of amount.

The 1099-INT shows interest in Box 1. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. You add all the interest amounts together when you file your return.

How to report the interest on your tax return

If you file Form 1040 (the standard federal income tax form), you report savings interest on Schedule 1, Part I, line 8. If you use tax software, it will ask you to enter the amount from your 1099-INT forms, and the software will place it in the correct location automatically.

You do not need to attach the 1099-INT to your return, but you should keep a copy for your records. If you received multiple 1099-INT forms from different banks, add them all together and report the total.

If you are married and file jointly, both spouses' interest income goes on the same return. If you file separately, each spouse reports only their own interest income on their individual return.

State income tax on savings interest

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

States with no income tax include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire and Tennessee tax interest and dividends but not wages. If you live in one of these states, you may owe no state tax on your savings interest.

If you live in a state with income tax, your state tax return will ask for interest income. The amount is usually the same as what you reported to the federal government. Some states offer a small exemption for interest income, but most do not.

How much tax you actually owe on the interest

The tax you owe on savings interest depends on your tax bracket, which is determined by your total income for the year. Tax brackets change each year and vary based on whether you file as single, married filing jointly, head of household, or another status.

For 2024, federal tax brackets range from 10% (the lowest bracket) to 37% (the highest). If your total income puts you in the 22% bracket and you earned $1,000 in savings interest, you would owe $220 in federal tax on that interest. If you are in the 32% bracket, you would owe $320 on the same $1,000.

Your tax software or tax preparer will calculate your bracket based on all your income sources — wages, self-employment income, investment gains, and interest. The interest is added to your other income to determine your bracket.

Why high yield accounts still make sense despite the tax

Even though you pay tax on the interest, high yield savings accounts typically offer better after-tax returns than regular savings accounts. A high yield account earning 4.5% annually will give you more interest than a regular account earning 0.01%, even after you pay tax on the higher amount.

The interest is also may provide and FDIC-insured up to $250,000 per account holder per bank. Unlike investment accounts, you do not have to worry about the value of your savings dropping due to market conditions. You pay tax on the interest you earn, but the principal stays safe.

If you are saving for a short-term goal — an emergency fund, a down payment, or money you will need within a few years — a high yield savings account is often the right choice despite the tax on interest. The tax is a cost of earning the interest, not a reason to avoid earning it.

Frequently Asked Questions

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

Yes. The $10 threshold is only for when banks must send you a 1099-INT form. You are required to report all interest income on your tax return, even if you earned $1 or $5. If you do not receive a 1099-INT, you still need to report the interest based on your account statements.

What if my bank sent me a 1099-INT with the wrong amount?

Contact your bank and ask them to issue a corrected 1099-INT (marked as a correction). Once you receive the corrected form, file an amended tax return using Form 1040-X and attach the corrected 1099-INT. Keep documentation of your communication with the bank in case the IRS asks questions.

Can I deduct any expenses against my savings interest?

No. Savings interest is reported as gross income, and you cannot deduct expenses related to maintaining the account. You report the full amount of interest earned and pay tax on it at your ordinary income rate.

Does interest from a money market account get taxed the same way?

Yes. Money market accounts, certificates of deposit (CDs), and other savings products all generate interest that is taxed as ordinary income. Your bank will send a 1099-INT for any of these accounts if interest earned reaches $10 or more during the year.

What if I moved money between banks during the year?

Each bank reports only the interest earned on money held in their account. If you moved $10,000 from Bank A to Bank B in June, Bank A reports interest earned January through May, and Bank B reports interest earned June through December. You add both 1099-INT forms together when you file your return.