1. What is Taxable Interest?

Taxable interest is the amount of interest earned on savings accounts, CDs, or other investments that must be reported as income on your tax return. For high-yield savings accounts, this interest is typically compounded monthly.

2. How Monthly Compounding Works

The calculator uses the monthly compounding formula:

Where:

• \( P \) — Principal amount (initial investment)
• \( r \) — Annual interest rate in decimal form (e.g., 0.05 for 5%)
• \( t \) — Time in years

Explanation: Interest is calculated each month and added to the principal, resulting in "interest on interest" over time.

3. Tax Implications

Details: All interest earned on high-yield savings accounts is generally taxable as ordinary income in the year it's credited to your account, even if you don't withdraw it.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a decimal (e.g., 0.05 for 5%), and time in years. The calculator will show the taxable interest earned.

5. Frequently Asked Questions (FAQ)

Q1: How is this different from simple interest?
A: Compound interest earns interest on both principal and accumulated interest, while simple interest only earns on the principal.

Q2: When is the interest taxed?
A: Interest is taxed in the year it's credited to your account, regardless of whether you withdraw it.

Q3: Are there any tax-free savings options?
A: Certain accounts like Roth IRAs or 529 plans offer tax advantages, but regular savings accounts are fully taxable.

Q4: How often is interest compounded?
A: Most high-yield savings accounts compound interest daily but pay it monthly.

Q5: Should I include cents in the principal?
A: For maximum accuracy, include cents in your calculation, though the tax difference will be minimal.