Do I Get Taxed on a High-Yield Savings Account? (2024)

Earning interest on your savings sure is nice—but it’s not all yours to keep. As with most earnings, Uncle Sam will want a cut. Depending on how much income you rake in each year—and how much interest your savings account garnered you, that cut could be hefty.

Since the Federal Reserve started hiking its federal-funds rate 18 months ago, interest rates on savings accounts and CDs have soared. Today, you can even find some banks offering high-yield savings accounts with 5% APYs or higher, up from just 0.50% to 1% a few years ago. In other words, on $10,000, you can earn $500 a year, up from just $50 to $100.

And as your earnings rise, so do the taxes you’ll need to pay on them. Has your high-yield savings account been racking up interest this year? Here’s what you can expect to pay in taxes for it.

How high-yield savings accounts are taxed

The interest you earn on a high-yield savings account—or any other savings account, money market account or certificate of deposit, for that matter—is subject to state and federal income taxes. This means there’s no hard-and-fast answer for what you’ll pay on your earnings. Instead, it depends on where you’re located and what tax bracket you fall into.

Federal tax brackets range from 10% for those on the lower end of the income scale up to 37.5% for the highest earners—$578,126 or more for solo tax filers in 2023. State taxes range just as much. Texas, for example, has no state income taxes. California’s income tax rate, on the other hand, goes up to 13.3%. Illinois, Indiana, Michigan and Pennsylvania all have rates between 3% and 5%.

So, depending on how much you bring in annually, taxes on savings account earnings could be quite a bit. For example, if you’re in the highest tax bracket and earned $3,000 in interest this year, you’d owe $1,125 in federal taxes on those earnings alone.

What’s more, savings account and CD interest contrast with investment income, which is often taxed at lower rates. For instance, tax rates on long-term capital gains and qualified dividends max out at 23.8%.

The upshot is that for many taxpayers, “the amount of taxable interest on savings accounts is small,” says Rob Burnette, a tax preparer at Outlook Financial Center in Troy, Ohio. But that’s not always the case. “For people that are highly risk-averse—many are older—then they will have a significant portion of their assets in savings accounts. Those numbers may be more noticeable.”

How to pay taxes on high-yield savings account

You’ll calculate the taxes you owe for savings account interest on the annual tax return you file on tax day (unless you got a tax extension). To start, your bank will send you a 1099-INT form, which will detail how much interest your accounts earned over the previous year. They’re required to send you this by Jan. 31 at the latest.

You’ll then use this form to report your taxable interest income on your tax return—technically called Form 1040. This number goes on Line 2b.

In the event your taxable interest earnings amount to $1,500 or more, you’ll also need to complete and attach a Schedule B form to your return. This is a specific form for reporting interest and dividends.

Do you need to report interest income under $10?

Banks only need to send you a Form 1099-INT if you’ve earned $10 or more in interest, but the IRS wants you to report any interest you earn—whether it’s $1 or $1,000.

Technically, failing to report even a few dollars of interest could make you liable for penalties or extra tax withholdings. Is it probable, though? Not really.

“It’s unlikely the IRS will extend its resources on something so small,” Burnette says. “If you’re being audited for other reasons, then they may nickel and dime you.”

How to avoid tax on a high-yield savings account

In general, you can expect to be on the hook for taxes if your savings account earns interest in any given year. However, if you’re willing to set your savings aside for retirement, there may be a loophole.

Opening an Individual Retirement Account, or IRA—a type of tax-advantaged investment account—for example, would allow you to potentially grow your money without paying taxes on it, at least until you withdraw the funds in retirement. Some IRAs offer access to high-yield savings accounts. You can also access other, similar savings vehicles like money market funds. (Though, if you’re young, you may stand to gain more by investing those funds in stocks rather than just saving them).

If you have a low tax bracket but expect a higher one later on in life, Roth IRA savings accounts could also be an option, as they let you fund your account with post-tax dollars, offering tax-free withdrawals later on. Just keep in mind: You won’t have easy access to your funds this way. Most retirement accounts won’t let you touch your money until you’re at least 59½ without a steep penalty—usually 10%.

So while putting your money in an IRA savings account might help you avoid taxes, it could pose a problem if you need the cash sooner—say for a down payment or taking a vacation.

As Burnette explains, “Early withdrawal penalties could make this approach very expensive.”

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