Every figure on this site is before tax. For a retirement account that is the end of the story. For an ordinary savings account, a money market account or a certificate of deposit, it is not.
Interest is ordinary income. It is taxed at your marginal rate, the same rate as your wages, and it does not receive the preferential treatment that applies to qualified dividends or long-term capital gains.
What that does to a yield
Take $25,000 at 4.50% APY for a year.
Interest earned: 25,000 x 0.045 = $1,125
Now apply a marginal rate:
| Marginal rate | Tax on the interest | Kept | Effective after-tax yield |
|---|---|---|---|
| 12% | $135.00 | $990.00 | 3.96% |
| 22% | $247.50 | $877.50 | 3.51% |
| 24% | $270.00 | $855.00 | 3.42% |
| 32% | $360.00 | $765.00 | 3.06% |
The headline rate is the same in every row. What you keep is not.
The shortcut is straightforward:
after-tax yield = APY x (1 - marginal rate)
At a 24% marginal rate, a 4.50% account is really paying you 3.42%. That is the number to hold against inflation. The advertised rate describes a hypothetical saver who pays no tax.
Why this matters more than it used to
When deposit rates were near zero, the tax on the interest was near zero too and the distinction was academic. At 4% or 5% it is not: a quarter to a third of the yield goes, every year, and it compounds against you because the tax is paid from money that would otherwise have stayed in the account.
The timing trap on certificates
Interest is generally taxable in the year it is credited, not the year you can finally touch it.
A five-year certificate that compounds annually credits interest each year. Each of those years produces taxable income, reported on a 1099-INT, even though withdrawing the money would trigger the early withdrawal penalty.
So it is possible to owe tax on interest you cannot access. The amounts are usually modest, and it is worth knowing before it happens rather than in February.
One related point: if you do pay an early withdrawal penalty, it is generally deductible against the interest, which softens the blow. The form reports both figures separately for that reason.
The form
Banks are generally required to issue a 1099-INT once interest reaches ten dollars in a year. Below that, no form is issued and the interest is still reportable. The threshold binds the bank.
If you hold accounts at several banks, each sends its own, and it is easy to overlook a small one from an account you barely use.
What this site does
Our calculators show pre-tax figures and say so next to the result. That is deliberate rather than lazy: the rate that applies to you depends on your marginal bracket, your state, and whether the account is taxable at all, none of which a calculator can see.
What you can do is run the after-tax rate through them. Enter 3.42% instead of 4.50% in the APY calculator and the projection becomes what you actually keep.
Where to check
The Internal Revenue Service publishes the rules on interest income, and Regulation DD governs how the yield itself must be disclosed, with the calculation set out in Appendix A to Part 1030. Nothing in the tax treatment changes the APY a bank quotes; it changes what is left of it.
This page describes how interest is taxed in general terms. What applies to your return depends on facts this site does not have, and a professional who can see them is a better source than any calculator.
Questions
- At what rate is savings interest taxed?
- As ordinary income, at your marginal rate, the same as wages. It does not get the lower rates that apply to qualified dividends or long-term capital gains. That is why a high-yield savings account and a stock held for years can produce very different after-tax outcomes from the same headline return.
- Do I owe tax if the bank does not send a 1099-INT?
- Yes. Banks are generally required to issue a 1099-INT at 10 dollars of interest or more, but the income is reportable whether or not a form arrives. The threshold decides when the bank must send a form. Your liability starts at the first dollar.
- When is interest taxed on a multi-year CD?
- Generally in the year it is credited, not the year the certificate matures. A five-year CD compounding annually usually produces taxable interest in each of those five years, which can mean owing tax on money you cannot withdraw without a penalty.
- Does state tax apply too?
- Usually, if your state taxes income. Interest on Treasury securities is generally exempt from state and local tax while remaining federally taxable, which is one reason a Treasury yield and a bank yield are not directly comparable.