Interest earned in a high-yield savings account is generally taxable income in the United States. You generally do not pay tax on money you deposit or later withdraw. You pay tax on the interest credited to the account, even if you leave that interest there.
High-Yield Savings Account Taxes at a Glance
| Question | Answer |
|---|---|
| Is the original deposit taxable? | Generally no, if it is money you already own and any taxable income that produced it was reported when required. |
| Is the interest taxable? | Yes. It is generally taxed as ordinary income. |
| Is the interest taxed as a capital gain? | No. Interest from a bank account is generally ordinary taxable interest. |
| Do you owe tax when you withdraw the money? | Usually no. The interest may already have been taxable when the bank credited it or made it available for withdrawal. |
| Will the bank send a tax form? | Usually, if the payer reports at least $10 of interest, you should receive Form 1099-INT. |
| Do you report small amounts of interest? | Yes. Taxable interest must be reported even if you do not receive Form 1099-INT. |
How Much Tax Do You Pay on High-Yield Savings Interest?
You generally pay tax on the interest at your applicable federal income tax rate. The amount depends on your filing status, total income, deductions, credits and state of residence.
For example, if the account earns $500 and your marginal federal tax rate is 22%, the federal tax attributable to that interest could be about $110 before deductions, credits and state taxes.
The account's APY determines how much interest you earn. It does not determine your tax rate. The IRS generally treats bank-account interest as taxable interest income.
Is High-Yield Savings Interest Taxed When It Is Deposited?
Generally, yes, when the bank credits the interest to your account and makes it available for withdrawal. You may owe tax even if you do not move the interest to your checking account or spend it.
For example:
- You deposit $20,000 into a high-yield savings account.
- The account earns $800 during the year.
- You leave the $800 in the account.
- The $800 is generally taxable interest income for that year.
Withdrawing the $800 later usually does not create a second tax.
How Do You Report High-Yield Savings Account Interest?
Report the interest on your federal tax return, whether or not the bank sends you a tax form. Taxable interest generally goes on Form 1040 or Form 1040-SR, line 2b.
You must report the interest if:
- You did not receive Form 1099-INT.
- The bank made an error or sent the form late.
- The bank automatically added the interest to your account.
- The amount was less than $10.
The $10 threshold generally determines when a payer must issue Form 1099-INT. It does not make smaller amounts of taxable interest tax-free.
If you have more than $1,500 in taxable interest and ordinary dividends, or meet other IRS conditions, you may also need to file Schedule B.
Do High-Yield Savings Accounts Have State Taxes?
Possibly. Many states tax interest income, but rates, deductions and exemptions vary. Some states do not impose a broad individual income tax.
Your federal return does not determine your state tax liability. Check your state's rules or speak with a tax professional if the interest is significant.
Does a High-Yield Savings Account Reduce Your Taxes?
Usually no. A high-yield savings account can offer a higher interest rate than a traditional savings account, but it does not normally provide a tax exemption.
Other accounts and investments may have tax advantages, including:
- Traditional and Roth IRAs
- Health savings accounts
- Certain employer retirement plans
- Some municipal bond investments
Each option has different tax rules, risks and withdrawal restrictions. The label "high-yield" does not give a bank account special tax treatment.
Are High-Yield Savings Accounts Still Worth Using?
Often, yes. Taxable interest can still be more useful than earning little or no interest in a traditional savings account.
When comparing accounts, check:
- APY
- Monthly fees
- Minimum balance requirements
- Withdrawal and transfer restrictions
- FDIC or NCUA insurance
- Whether the rate is promotional or variable
Compare the amount you expect to keep after tax and fees, not just the advertised APY. Taxes reduce the return, but they do not remove the benefit of earning interest.
Bottom Line
Use Form 1099-INT as a check against your account records, not as a reporting limit. Report all taxable interest, including amounts below $10, and check your state and local tax rules.