Do High Yield Savings Accounts Get Taxed?
Understand the tax implications for high-yield savings account interest and your reporting duties. Learn how these accounts integrate with your taxes.
Interest earned from High-Yield Savings Accounts (HYSAs) is subject to taxation. Both federal and most state governments consider this interest taxable income. This applies to all interest earned, though reporting requirements vary based on certain thresholds.
Understanding High-Yield Savings Account Interest Taxation
Interest income from High-Yield Savings Accounts is taxed as ordinary income. It is treated similarly to wages and subject to your marginal tax rate. The tax applies to interest earned during the year, not the principal, and is taxable even if funds are not withdrawn.
Interest accrued adds to your total taxable income. The amount of tax owed depends on your income tax bracket. Most states also tax this interest, aligning with federal treatment, though a few states may offer exemptions.
Reporting Your Interest Income
Financial institutions are required to issue Form 1099-INT, “Interest Income,” to account holders when interest earned reaches $10 or more in a calendar year. This form details the payer, recipient, and total interest received. Even if interest is less than $10 and a 1099-INT is not received, all interest income must still be reported to the Internal Revenue Service (IRS).
This interest income is reported on your federal income tax return. If your total taxable interest income from all sources exceeds $1,500, it is reported on Schedule B, “Interest and Ordinary Dividends,” attached to Form 1040. For amounts below this threshold, interest can be reported directly on Form 1040. Accurate reporting ensures tax compliance.
Exploring Tax-Advantaged Savings Options
Several other savings and investment accounts offer distinct tax treatments compared to High-Yield Savings Accounts. Roth IRAs allow after-tax contributions, meaning qualified withdrawals in retirement are entirely tax-free. Earnings within a Roth IRA also grow tax-free.
A 529 plan, designed for education savings, offers tax-deferred growth and tax-free withdrawals for qualified educational expenses. Contributions are made with after-tax money, but the tax-free growth and withdrawals make them efficient for educational funding.
Health Savings Accounts (HSAs) offer a triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free qualified withdrawals for medical expenses. Eligibility requires enrollment in a high-deductible health plan.
Municipal bonds offer specific tax benefits. Interest earned on these bonds is often exempt from federal income tax. If issued by a state or local government within your state of residence, the interest may also be exempt from state and local taxes, appealing to investors in higher tax brackets.