Interest rates on high-yield savings accounts were soaring throughout 2024, helping depositors earn impressive returns. But now, it’s time for the IRS to claim its share.
The IRS classifies earned interest as taxable income, which means any earnings from deposit accounts—including savings, checking, and certificates of deposit (CDs)—must be reported and taxed. Even those welcome bonuses from opening new accounts aren’t exempt.
Yes, Those Bank Bonuses Count as Income
“If you receive a bonus for opening a new checking account or credit card, expect a Form 1099-INT or possibly a Form 1099-MISC at tax time,” says Hannah Black, Senior Tax Research Analyst at the Tax Institute at H&R Block. “Even if you don’t get the form, you must report the bonus on your tax return, so keep good records of any bonuses you receive.”
Taxes are an unavoidable part of financial planning, and interest income should be factored into your savings strategy. The amount you owe depends on your tax bracket; the higher your bracket, the greater the percentage you’ll owe on interest earnings.
What Types of Interest Are Taxable?
The IRS considers interest earned from deposit accounts as taxable income. If you earned at least $10 in interest in 2024, expect to receive a 1099-INT form from your financial institution by January 31. This form details how much interest was paid to you and must be included in your tax return.
You should expect to pay taxes on interest earned from:
- Interest-bearing checking accounts
- Welcome bonuses on checking or savings accounts
- Certificates of deposit (CDs)
- Money market accounts (MMAs)
Those tempting welcome bonuses? They’re taxable too. Keep that in mind before jumping on the next promotional offer.
Set Money Aside for Taxes
Paul Miller, CPA, founder of Miller and Company, recommends setting aside a portion of your earned interest and welcome bonuses throughout the year to cover taxes.
If you end up owing less than anticipated, you can always roll the extra funds into your emergency savings.
Keep Good Records—Even If You Don’t Get a 1099-INT
Financial institutions are only required to send a 1099-INT if you earned more than $10 in interest. If you don’t receive one, that doesn’t mean you’re off the hook.
“Make sure to keep track of your monthly financial statements,” says Black. Bank accounts, investment accounts, credit cards, and mortgages each have unique tax reporting requirements.
If you didn’t receive a 1099-INT, check your year-end financial statements or contact your bank to verify your earnings. Still unsure? You can always contact the IRS to confirm what you may owe.
Tax-Advantaged Savings Alternatives
While interest rates on savings accounts remain high for now, they aren’t guaranteed to stay that way—and taxes will always apply. If you want to reduce your tax burden, consider shifting some of your savings to tax-advantaged accounts.
Roth IRAs
A Roth IRA allows you to save money you’ve already paid taxes on, offering tax-free growth and withdrawals in retirement. In 2024, you can contribute up to $7,000 annually if you meet income requirements. You can withdraw contributions at any time without penalties, but earnings withdrawals require a five-year waiting period for tax-free access.
529 Plans
If you’re saving for education expenses, a 529 plan could be a smart choice. Contributions grow tax-free, and withdrawals for qualified expenses are tax-exempt. Plus, if your child decides not to use the funds for school, they can roll over up to $7,000 per year into a Roth IRA in their name.
The Bottom Line
High-yield savings accounts and CDs are still offering strong interest rates and enticing welcome bonuses. But if you’re taking advantage of these opportunities, don’t forget to set aside money for your tax bill.
By staying informed and planning ahead, you can maximize your savings while keeping the IRS off your back.