Do I Pay Taxes on a High-Yield Savings Account?
Understand the taxability of interest earned from high-yield savings accounts. Gain insights into how these earnings integrate with your overall tax picture.
High-yield savings accounts (HYSAs) offer a higher interest rate compared to traditional savings accounts, allowing your money to grow more quickly. The interest earned from HYSAs is subject to taxation.
Understanding Taxable Interest from HYSAs
Interest income from a high-yield savings account is considered taxable ordinary income by the Internal Revenue Service (IRS). The taxability applies to all interest earned, regardless of the amount.
Financial institutions credit interest to your account periodically, and this interest becomes taxable in the year it is credited. For example, if you earn $5 in interest in a year, that $5 is still taxable income.
Receiving and Reporting Form 1099-INT
Your bank or financial institution is generally required to issue Form 1099-INT, “Interest Income,” if you earn $10 or more in interest during a calendar year. This form details the total taxable interest you received. Financial institutions must send you a copy of Form 1099-INT by January 31st of the year following the tax year in which the interest was earned.
Even if you do not receive a Form 1099-INT because the interest earned was less than $10, you are still responsible for reporting all taxable interest income on your federal income tax return. This income is reported on Schedule B, “Interest and Ordinary Dividends,” which is then attached to your Form 1040. If your total taxable interest from all sources exceeds $1,500, you are required to file Schedule B.
Schedule B requires you to list the name of each payer and the amount of interest received. The amount shown in Box 1 of your Form 1099-INT represents the taxable interest and should be entered on the appropriate line for taxable interest on your Form 1040. Any federal income tax withheld, shown in Box 4 of the 1099-INT, should also be reported on your tax return.
How HYSA Interest Affects Your Tax Bill
Interest income from a high-yield savings account is taxed at your ordinary income tax rates. These are the same tax rates that apply to other forms of ordinary income, such as wages and salaries. The federal ordinary income tax rates currently range from 10% to 37%, depending on your total taxable income and filing status.
This interest income increases your overall gross income, which could potentially place you in a higher tax bracket if the additional income pushes you over a bracket threshold. For instance, if earning significant interest moves you from a 12% bracket to a 22% bracket, the income falling into the higher bracket will be taxed at that new rate. State income taxes may also apply to interest income, depending on your state of residence, as most states tax interest income unless specifically exempted.
If you earn a substantial amount of interest from your HYSA throughout the year, it could contribute to an unexpected tax liability at tax time. It is important to consider this potential impact when estimating your tax obligations. Understanding how this income integrates with your overall financial picture can help avoid surprises when filing your annual tax return.