Do You Have to Pay Taxes on a High Yield Savings Account?

Taxation Basics of High-Yield Savings Account Interest

A high-yield savings account (HYSA) offers a significantly higher annual percentage yield (APY) than traditional savings accounts. Interest earned on funds held within a HYSA is generally considered taxable income.

The interest income generated from a high-yield savings account is classified as ordinary income for federal tax purposes. This means it is subject to the same federal income tax rates that apply to wages, salaries, and other forms of regular income. The specific tax rate an individual pays on this interest depends on their overall taxable income and filing status.

In addition to federal taxation, the interest earned may also be subject to state income taxes. The taxability of interest income at the state level varies considerably, as some states do not impose an income tax, while others do. For states that tax income, interest from a HYSA is typically treated similarly to how it is handled at the federal level.

Interest income is generally considered taxable in the year it is credited to your account, even if you do not withdraw the funds. Financial institutions are required to report interest paid to the IRS and account holders. While a Form 1099-INT is not required for interest under $10, you must still report all earned interest on your tax return.

Information Needed for Reporting Interest

The primary document for reporting interest earned from a high-yield savings account is Form 1099-INT, “Interest Income.” Your financial institution generates this form to report the total interest paid to you and the IRS during the calendar year.

Form 1099-INT contains several pieces of crucial information for tax reporting. Key details include the payer’s name, which is your financial institution, and the recipient’s name and taxpayer identification number, typically your Social Security Number. The most important figure on the form is the amount reported in Box 1, “Interest Income,” which indicates the total taxable interest you earned.

This form may also include other relevant information in various boxes, such as early withdrawal penalties or interest on U.S. savings bonds. If any federal or state income tax was withheld from your interest earnings, those amounts would also be reported on this form. The inclusion of your Social Security Number ensures that the IRS can match the reported income to your tax return.

Financial institutions are typically required to mail or electronically deliver Form 1099-INT to account holders by January 31st of the year following the tax year in which the interest was earned. For example, for interest earned in 2024, you should expect to receive your Form 1099-INT by January 31, 2025. This deadline provides ample time for taxpayers to prepare their returns.

Keep this form for your tax records. A copy of Form 1099-INT is also sent directly to the IRS, so ensuring your reported information matches the form is important to avoid discrepancies.

Reporting Your Interest Income to the IRS

When filing your tax return, use the information from Form 1099-INT to report your high-yield savings account interest. If you did not receive a form because your interest was less than $10, you must still calculate and report the total interest earned from your statements.

For taxpayers whose total interest income from all sources, including high-yield savings accounts, is $1,500 or less, the interest can often be reported directly on Line 2b of Form 1040, U.S. Individual Income Tax Return. This simplifies the reporting process for those with relatively small amounts of interest income. This direct reporting method is common for many individuals with HYSAs.

However, if your total interest income for the year exceeds $1,500, you are generally required to report it on Schedule B, Interest and Ordinary Dividends, which is an attachment to Form 1040. Schedule B provides a detailed breakdown of all interest income sources, and the total from this schedule is then carried over to Line 2b of Form 1040. This ensures a comprehensive accounting of all interest earnings.

When using tax preparation software, you will typically be prompted to enter the information from your Form 1099-INT directly into the program. The software then automatically populates the correct lines on Form 1040 or Schedule B, depending on your total interest income. This automates the process and helps ensure accuracy in reporting.

For high-yield savings accounts held jointly, the interest income is generally attributed to the individual whose Social Security Number is listed first on the account. However, joint account holders can agree to allocate the income differently for tax purposes, often based on who contributed the funds or who has control over the income. Clear communication between joint account holders can prevent reporting discrepancies.

If you anticipate earning a substantial amount of interest income from your high-yield savings account, it may be necessary to make estimated tax payments throughout the year. This helps prevent an underpayment penalty that could arise if your tax liability is not sufficiently covered by other withholding.