Tax on HYSA and Money Market Interest in 2026: federal, state, and 1099-INT
Interest is ordinary income -- taxed at your marginal rate. Here is the full picture for 2026.
Ordinary income
Federal treatment: same rate as wages, 10-37%
+ State tax
Except in 9 no-income-tax states
1099-INT
Issued if you earn $10+ in a tax year
Federal tax: 2026 rates
| 2026 marginal rate | Single filer income | Tax on $1,000 HYSA interest |
|---|---|---|
| 10% | Up to $11,600 | $100 |
| 12% | $11,601-$47,150 | $120 |
| 22% | $47,151-$100,525 | $220 |
| 24% | $100,526-$191,950 | $240 |
| 32% | $191,951-$243,725 | $320 |
| 35% | $243,726-$609,350 | $350 |
| 37% | Over $609,350 | $370 |
Marginal rates apply only to the portion of income in that bracket. Tax on interest applies at whatever bracket your total income falls into. Confirm 2026 brackets with IRS.gov or a tax professional.
State tax: who pays and who does not
9 no-income-tax states (no state tax on HYSA interest)
AlaskaFloridaNevadaNew Hampshire*South DakotaTennesseeTexasWashingtonWyoming
*New Hampshire phased out its interest and dividend tax; fully exempt from 2025 onward.
High-tax states: impact on HYSA yield
California (13.3% top rate)-$133 per $1,000
New York (10.9% top rate)-$109 per $1,000
Oregon (9.9% top rate)-$99 per $1,000
New Jersey (10.75%)-$108 per $1,000
State-tax advantage of government money market funds
Government money market funds (VUSXX, VMFXX, SPAXX, SNVXX) hold primarily US Treasury securities. Interest from US obligations is generally exempt from state income tax. If the fund holds 80%+ Treasury securities, approximately 80%+ of your dividends may qualify for state exemption.
Example: California resident, $20,000 in cash at 4.50% APY
Marcus HYSA 4.10%: $820 interest, minus 13.3% CA tax = $711 net (on CA income)
VUSXX (gov MMF) 4.50%: $900 interest, CA exempt = $900 net (no CA tax)
Difference on CA portion: ~$189/year in state tax savings
Note: MMFs are not FDIC insured. This is a yield-vs-risk trade-off. Verify current fund percentages at fund prospectus pages. See MMA vs MMF for the full comparison.
Frequently asked questions
Is HYSA interest taxable income?⌄
Yes. Interest earned on a high-yield savings account is taxable as ordinary income at your federal marginal rate (10%, 12%, 22%, 24%, 32%, 35%, or 37% in 2026). You also owe state income tax on this interest unless you live in one of the 9 no-income-tax states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming). Your bank sends a 1099-INT if you earn more than $10 in interest during the year.
Do I owe tax on HYSA interest if I did not receive a 1099-INT?⌄
Yes. Banks only send a 1099-INT if you earn more than $10 in interest. But if you earned $9.50 in interest, you still technically owe tax on it -- you just do not get a form. The IRS requires you to report all taxable income, including small amounts of interest. This is rarely enforced for tiny amounts, but technically you owe it.
What is backup withholding on a savings account?⌄
If you fail to provide a valid taxpayer identification number (TIN/SSN) on the W-9 form when opening an account, or if the IRS notifies the bank your TIN is incorrect, the bank is required to withhold 24% of your interest payments and send that money to the IRS. This is backup withholding. To fix it, provide the correct TIN to the bank and request a refund or credit on your tax return.
How do government money market funds reduce state taxes?⌄
Government money market funds (VUSXX, VMFXX, SPAXX) hold primarily US Treasury securities. Interest from US Treasury obligations is exempt from state income tax in most states. If a fund holds 80%+ Treasury securities, often 80%+ of the fund's dividends qualify for state exemption. This matters most in high-income-tax states: California (13.3%), New York (10.9%), Oregon (9.9%). On $100,000 in a government MMF at 4.50%, a California resident saves roughly $470/year in state tax vs the same money in a taxable HYSA.
How does interest from a joint savings account get reported for taxes?⌄
The bank issues one 1099-INT for the joint account, typically in the name and SSN of the primary account holder. Each co-owner is responsible for reporting their share of the interest income on their own tax return. The IRS allocates interest from joint accounts based on state law ownership -- in most community property states, that is 50/50. The non-primary co-owner may need to report the income on a separate Schedule B and explain the split.