Interest earned on a high yield savings account is taxable income, and the IRS treats it the same as wages: you owe tax at your ordinary income rate on whatever the account paid you, not on the money you originally deposited. That surprises a lot of savers once rates climb.
In Brief
- Savings account interest, CD interest and money market interest all count as ordinary income for tax purposes.
- Treasury bill interest is federally taxable but exempt from state tax, and it's taxed in the year the bill matures.
- Series EE and Series I savings bond interest isn't taxed until you cash them in or they mature.
- Banks and credit unions send Form 1099-INT once your account crosses the IRS reporting threshold.
- High earners with large savings balances may also owe the 3.8% net investment income tax.
Why That Extra Interest Comes With a Tax Bill
When the Federal Reserve pushes rates up, banks respond by offering better yields on savings accounts, money market accounts and certificates of deposit. That's good news for anyone parking cash. The catch is that the IRS wants a piece of nearly all of it. Interest from savings accounts, high yield savings accounts, money market accounts and CDs gets taxed as ordinary income, right alongside your paycheck.
Chip Capelli, an accountant based in Provincetown, Massachusetts, points out that this can catch people off guard.