Do You Have to Pay Taxes on a HYSA?

High-yield savings accounts (HYSAs) offer significantly higher interest rates than traditional savings accounts, making them attractive for emergency funds or short-term financial goals. Interest earned from HYSAs is considered taxable income. This article explains how HYSA interest is taxed and what you need to know for tax compliance.

Federal Income Taxation of HYSA Interest

Interest earned from a high-yield savings account is classified by the Internal Revenue Service (IRS) as ordinary income. It is subject to federal income tax at your marginal tax rate, which is the same rate applied to your wages or salary. For example, if your highest tax bracket is 22%, your HYSA interest will also be taxed at that 22% federal rate.

Interest is taxable in the year it is credited to your account, regardless of whether you withdraw the money. Even if you leave the interest to compound within the HYSA, it is considered income for that tax year. Financial institutions are required to report the interest you earn to the IRS.

This reporting helps the IRS track interest income. The amount of tax you owe on this interest depends on your overall taxable income and the applicable federal tax brackets. Higher taxable income generally leads to a higher marginal tax rate, resulting in a larger tax liability on your interest earnings.

Reporting HYSA Interest Income

Banks and financial institutions issue Form 1099-INT, “Interest Income,” to account holders. This form details the total interest earned during the calendar year. The information on Form 1099-INT is also sent directly to the IRS.

A Form 1099-INT is issued if you earn $10 or more in interest from a single financial institution in a year. Even if you earn less than $10 and do not receive a 1099-INT, the interest is considered taxable income and must be reported on your federal tax return. The IRS requires all earned income to be reported, regardless of the amount or whether a specific form is received.

When preparing your federal income tax return, typically Form 1040, you will report your HYSA interest income. If your total taxable interest income from all sources exceeds $1,500, you will need to file Schedule B, “Interest and Ordinary Dividends,” with your Form 1040. On Schedule B, you list the payer’s name (the bank) and the amount of interest received. For those with less than $1,500 in total interest, the amount can often be reported directly on line 2b of Form 1040.

State and Local Tax Considerations

Beyond federal taxes, interest earned from high-yield savings accounts may also be subject to state and, in some cases, local income taxes. The taxation of interest income at the state and local levels varies significantly across different jurisdictions. Some states fully tax interest income, while others may offer exemptions or tax it at different rates.

Some states, for instance, do not have a state income tax at all, meaning HYSA interest would only be subject to federal taxation. Conversely, other states may tax interest income as ordinary income, similar to the federal treatment. It is important for taxpayers to consult their specific state and local tax laws to understand their obligations. This ensures compliance with all applicable tax regulations beyond the federal level.