Savings account interest and tax

Interest from a high-yield savings account is ordinary income. It gets added to your wages and other income and is taxed at your normal rate. There is no special lower rate for it, the way there is for some long-term investment gains.

Two things about this catch people out. You owe the tax even if you never touched the money, and the form your bank sends only arrives above a threshold, while the tax itself starts from the first cent.

The IRS taxes interest in the year it becomes available to you, not the year you spend it. Their wording is that interest credited to an account you can withdraw from without penalty is taxable income in the year it becomes available.

So if your account earned $400 last year and you left all $400 sitting there to keep compounding, that $400 was income last year. Leaving it alone does not defer anything.

This is worth knowing before you look at a long projection. The balance the calculator shows you is a pre-tax number.

Your bank sends you Form 1099-INT when it has paid you $10 or more in interest during the year. It usually turns up in January, covering the year just ended, and the same figure goes to the IRS.

If you earned less than $10 you probably will not get a form. That does not make the money untaxed. The $10 is the point where the bank has to report, not the point where the income starts counting. Your December statement or your online account will show the year’s total.

If you hold savings at more than one bank, expect a separate form from each. It is easy to forget the account you opened for a bonus and barely used.

If your taxable interest and ordinary dividends together come to more than $1,500 for the year, you generally file Schedule B with your return, listing each payer. Under that, you can usually just report the total.

At current online savings rates a balance in the tens of thousands can cross $1,500 on its own, so this is not an exotic case for someone using a savings calculator.

We are not going to give you a percentage, because there is not one that applies to everybody. Savings interest stacks on top of your other income and is taxed at your marginal rate. The same $500 of interest costs one person $60 and another $185.

A rough way to think about it: whatever bracket your last dollar of income falls in is roughly what your interest costs you. If you want an actual number, that is a question for a tax professional or your filing software, both of which can see your whole situation. This page cannot.

For most people whose only extra income event is savings interest, this is a small addition to an otherwise ordinary return, and many qualify to file for free. IRS Free File is the place to check that before paying for anything.

We deliberately do not sell you tax software on this page. If your return is more complicated than a 1099-INT, paid software or an accountant may well be worth it, but that is a decision about your whole tax picture and not something a savings calculator should be nudging.

Tax is charged on the interest you were actually paid, so the rate you earn matters more than the tax treatment does. A percentage point of extra yield is worth more to you than any amount of clever handling of a 1099-INT.

If you have not checked what your savings account currently pays, run the numbers and then compare accounts on fees and access.

Is high-yield savings account interest taxable?

Yes. The IRS treats interest from a savings account as ordinary income, taxed at your normal income tax rate rather than at a lower investment rate. This is true whether the account is at an online bank, a credit union or a branch bank, and it is true no matter what the account is called. Source: IRS Topic No. 403, Interest Received.

Do I pay tax on savings interest if I never withdraw it?

Yes, and this surprises people. The IRS taxes interest in the year it becomes available to you, not the year you spend it. If your bank credited interest to your account and you could have withdrawn it without a penalty, it counts as income for that year even if you left every cent of it in the account. Source: IRS Topic No. 403.

When does a bank send a 1099-INT?

Banks issue Form 1099-INT when they pay you at least $10 of interest during the year. You will usually receive it in January for the year before. Source: IRS Instructions for Forms 1099-INT and 1099-OID.

Do I still owe tax if I earned under $10 and got no 1099-INT?

Yes. The $10 figure is the threshold at which the bank has to send you a form, not the point at which the income becomes taxable. Interest is taxable from the first cent. If no form arrives you are still expected to report what you earned, and your year-end account statement will show the figure.

What is the $1,500 Schedule B rule?

If your total taxable interest and ordinary dividends come to more than $1,500 for the year, you generally have to file Schedule B alongside your return to list where the interest came from. Below that you can usually report the total without the extra schedule. Source: IRS Instructions for Schedule B (Form 1040).

How much tax will I pay on my savings interest?

It is added to your other income and taxed at your marginal rate, so there is no single percentage that applies to everyone. Someone in the 12% bracket and someone in the 32% bracket owe very different amounts on the same interest. We cannot tell you your rate, and any site that gives you a number without knowing your full tax situation is guessing.

Do I owe state tax on savings interest too?

It depends on where you live. Some states tax interest income, some do not tax personal income at all, and the rules differ. The IRS is a federal agency and does not publish state rules, so check your own state's revenue department rather than assuming.