Bank Gap by State
The Bank Gap in Alabama
Alabama pairs a moderate state income tax with one of the lower costs of living in the country, so the national Bank Gap is largely a straightforward math problem here rather than a tax puzzle.
Last reviewed August 7, 2026 · SwitchWize Research Desk
Before AL tax
$1,005/yr
on a $25,000 balance
After AL 5% tax
$955/yr
recoverable by switching
On a $25,000 balance, the gap is about $1,005 a year before tax. After Alabama's 5% top income-tax rate on the additional interest, you keep about $955. Because Treasury interest is exempt from Alabama income tax, routing that cash through a state-tax-exempt Treasury vehicle can recover most of the difference.
Estimated Bank Gap by balance
| Balance | Current earnings | Better-fit earnings | Estimated Bank Gap | After AL tax |
|---|---|---|---|---|
| $5,000 | $19 | $220 | $201 | $191 |
| $10,000 | $38 | $440 | $402 | $382 |
| $25,000 | $95 | $1,100 | $1,005 | $955 |
| $50,000 | $190 | $2,200 | $2,010 | $1,910 |
| $100,000 | $380 | $4,400 | $4,020 | $3,819 |
Estimates over 12 months at 0.38% current APY and 4.40% better-fit APY. The "After AL tax" column applies AL's 5% top income-tax rate to the additional interest; federal tax applies on top and is not shown. Example only — your result depends on your balance, rates, and time horizon.
Why Alabama changes the math
Alabama taxes savings interest as ordinary income at a top rate of 5.0%. Treasury interest is generally exempt from Alabama's income tax, so the after-tax edge from T-Bills or a government money market fund is real but modest at this rate compared to the highest-tax states.
A lower cost of living means a typical Alabama emergency fund is a smaller dollar figure than in expensive coastal states, but the percentage-point Bank Gap still applies in full to whatever that balance is.
Cost of living in Alabama is below the national average across most of the state, which shapes how large an emergency fund needs to be and therefore how many dollars the Bank Gap quietly costs on idle cash.
Because Alabama taxes savings interest but not Treasury interest, the highest after-tax yield is not always the highest headline APY. Run your tax profile through the short-term savings tool to see whether a Treasury bill or government money market fund beats a taxable account for you.
Open the short-term savings toolFrequently asked questions
Does Alabama tax high-yield savings account interest?
Is a high-yield savings account worth it in Alabama?
Are T-Bills better than a HYSA for Alabama savers?
Your personal Bank Gap
See exactly what the gap is costing you.
Enter your balance and current rate. The Rate Gap Calculator shows the gap per year and over five years.
Calculate my Bank GapEducational information, not tax or financial advice. State tax rules are summarized at a high level and depend on your full situation. Rates are illustrative of current market conditions and should be confirmed with the provider. Confirm tax treatment with a qualified professional.