Do I Have to Pay Taxes on a HYSA?
Learn about the tax treatment of High-Yield Savings Account interest for effective financial planning.
A High-Yield Savings Account (HYSA) offers significantly higher interest rates than traditional savings accounts. These accounts allow your money to grow more quickly due to competitive annual percentage yields (APYs) and compounding interest. The interest earned from HYSAs is generally considered taxable income, meaning you will likely owe taxes on the interest your HYSA generates.
Understanding HYSA Interest Taxation
Interest earned from a High-Yield Savings Account is considered ordinary income by the Internal Revenue Service (IRS). This means the interest is taxed at your individual marginal income tax rate, the same rate applied to other regular income sources like wages. The amount of tax you owe depends on your overall taxable income and your applicable tax bracket.
The interest earned in an HYSA is taxable in the year it is credited to your account, regardless of whether you withdraw the funds. Even if you leave the interest to compound, it is still subject to taxation for that tax year. All interest income, even small amounts, is legally taxable and should be reported.
Reporting HYSA Interest
Financial institutions are required to report interest income to both you and the IRS when it reaches $10 or more in a calendar year. Your bank will issue a Form 1099-INT for this purpose. This form is important for accurately reporting your interest income on your federal tax return.
The Form 1099-INT details the total interest income you received during the year. Since a copy is also sent directly to the IRS, the IRS is aware of the interest income you earned. Taxpayers typically report this interest income on Schedule B, “Interest and Ordinary Dividends,” if their total interest income exceeds $1,500. Otherwise, it is generally reported directly on Form 1040.
Paying Taxes on HYSA Interest
Once your High-Yield Savings Account interest is reported, it is combined with all your other taxable income to determine your total tax liability for the year. This interest contributes to your overall adjusted gross income, which then dictates your final tax bill. The tax owed on this interest is not paid separately but is part of your total income tax calculation.
For individuals who earn a significant amount of HYSA interest, or have other substantial income not subject to payroll withholding, estimated tax payments may be necessary. If you expect to owe at least $1,000 in taxes not covered by withholding, the IRS generally requires you to make quarterly estimated tax payments. Failing to pay enough tax throughout the year can result in underpayment penalties.
Most states that levy an income tax will also consider HYSA interest as taxable income. While specific state tax laws vary, interest earned will generally be subject to state income tax in addition to federal obligations. Taxpayers should consult their state’s tax guidelines.