United States · Updated for the 2025 tax year
See what your savings actually keep after tax.
Your bank advertises a shiny APY — but interest is taxed as ordinary income every year. This high-yield savings account tax drag calculator shows the real, after-tax return you get to keep.
Estimated Tax Breakdown
Tax drag includes the tax you owe on interest plus the compounding those dollars would have earned had they stayed in the account. Estimates only — not tax advice.
The drag wedge
Gross return vs. what you keep
The shaded amber area is money the advertised APY implies you'll have — but tax quietly takes. It widens every year.
Where else could this cash go?
Overlay a tax-advantaged cash equivalent. Same deposit, same APY, different tax treatment.
The plain-English guide
High-yield savings, tax, and the return you really earn
A 5% APY is a headline, not a promise of 5% in your pocket. Because interest is taxed as ordinary income the year you earn it, your real return is always lower than the rate on the banner. Here is exactly how that works, the math behind the calculator, and how it plays out for a saver in Texas versus one in California.
What is "tax drag," and how does it affect your savings?
Tax drag is the reduction in your investment return caused by paying tax along the way rather than at the very end. With a high-yield savings account it is unavoidable: the interest your bank pays is ordinary income, taxed at the same marginal rate as your salary — not the lower long-term capital gains rate that stocks and funds can qualify for. If you sit in the 24% federal bracket, roughly a quarter of every dollar of interest is spoken for before it ever compounds.
The bank does not take this out for you. Unlike a paycheck, there is no automatic withholding on ordinary savings interest. Instead your bank sends you (and the IRS) a Form 1099-INT in January, and the bill comes due when you file. That timing lulls people into treating the advertised APY as their real yield, when the after-tax figure is what actually grows their wealth.
There is a second, sneakier cost. Every dollar you hand over in tax each year is a dollar that is no longer in the account earning next year's interest. So tax does not just shave your return once — it quietly erases future compounding too. Add inflation on top, and the real purchasing power of cash can barely move, even at a seemingly attractive 4–5% headline rate.
The math behind the calculator
The engine starts from the standard compound-interest formula, then applies tax to the growth rate. Money compounds monthly, and a fixed monthly contribution is added along the way:
Where A = final balance, P = principal (your initial deposit), r = annual rate, n = compounding periods per year (12), and t = years.
To model tax, the calculator lowers the effective growth rate by your combined marginal tax rate. The rate that actually compounds is the after-tax rate:
Tax Rate = your federal marginal rate + your state rate. The tool runs the formula twice — once at the full rate for the "gross" line, once at rnet for the "net" line. The distance between them is your tax drag, including the compounding you never got to keep.
Real-world scenarios: high bracket vs. low bracket
Two savers each start with $10,000, add $500 a month, and earn a 4.5% APY for 10 years. The only difference is their tax situation — and it changes the outcome by thousands of dollars.
Sofia · earns $50,000
- Federal bracket
- 12%
- State tax
- 0%
- Gross balance
- $90,767
- Tax drag
- −$2,818
- Net balance kept
- $87,949
David · earns $250,000
- Federal bracket
- 35%
- State tax
- 9.3%
- Gross balance
- $90,767
- Tax drag
- −$9,946
- Net balance kept
- $80,821
Same deposit, same bank, same rate — yet David loses roughly $9,946 to tax drag while Sofia loses under $2,900. His combined marginal rate of 44.3% means nearly half of every dollar of interest never compounds. For a high earner in a high-tax state, that gap is often the deciding reason to move idle cash into Treasury bills (exempt from state tax) or a tax-advantaged account.
| Saver | Combined rate | Total interest | Tax drag | Net kept |
|---|---|---|---|---|
| Sofia · earns $50,000 | 12% | $20,767 | −$2,818 | $87,949 |
| David · earns $250,000 | 44.3% | $20,767 | −$9,946 | $80,821 |
Figures are illustrative, use the marginal-rate approximation described above, and assume the tax is paid from the account. Your real result depends on how interest interacts with your full return. Run your own numbers in the calculator above.
Answers
Frequently asked questions
No. Banks do not withhold income tax on ordinary savings interest. They report what you earned to you and the IRS on Form 1099-INT, and you pay the tax when you file. The one exception is backup withholding, which only applies if the IRS has flagged your account — usually for a missing or incorrect taxpayer ID number.
Federally, yes — it is taxed as ordinary income at your marginal rate. At the state level it depends where you live. States with no tax on interest income in 2025 include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Everywhere else, state tax stacks on top of federal and increases your total drag.
As a close approximation, multiply the interest you earn by your combined marginal rate (federal + state). For example, $1,000 of interest in the 24% federal bracket plus a 5% state rate is roughly $290 of tax. The calculator above does this for every year of compounding, and adds the growth those tax dollars would otherwise have earned.
Banks must issue Form 1099-INT by January 31 for interest paid the previous calendar year, and only when you earned $10 or more. If you earned less than $10 and get no form, the interest is still taxable and you are expected to report it.
Common legal routes: hold cash in tax-advantaged accounts like a Roth IRA or HSA; use U.S. Treasury bills or I bonds, whose interest is exempt from state and local tax; or municipal money-market funds whose income can be federally tax-exempt. Each has eligibility rules and trade-offs — confirm your specifics with a qualified tax professional.
Yes — more than most people expect. Because interest is taxed every year, the dollars paid in tax never compound. Over five to ten years that lost compounding widens the gap between advertised yield and real return. That widening gap is exactly the amber wedge the calculator draws.
Runs in your browser
No sign-up, no account numbers, nothing uploaded. Every figure is calculated locally on your device.
Transparent method
The exact formulas are shown above — no black box. You can check the math yourself and see every assumption.
Educational, not advice
Built to help you understand your real return. For decisions on your money, talk to a licensed professional.