Do You Have to Pay Taxes on a HYSA?
Navigate the tax implications of your High-Yield Savings Account. Learn what you need to know to properly account for HYSA earnings.
A High-Yield Savings Account (HYSA) is a type of savings account that typically offers a higher annual percentage yield (APY) compared to traditional savings accounts. This higher interest rate allows your deposited money to grow more quickly over time. While HYSAs are popular for their growth potential, the interest earned from these accounts is generally considered taxable income.
Understanding How HYSA Interest is Taxed
Interest income from an HYSA is classified by the Internal Revenue Service (IRS) as ordinary income. This means it is subject to federal income tax, similar to how wages or other regular earnings are taxed. The specific tax rate applied depends on an individual’s total taxable income and their marginal tax bracket.
Beyond federal taxes, interest earned in an HYSA may also be subject to state income taxes. Most states that impose an income tax will include interest income in their taxable calculations. Account holders should understand the tax regulations in their specific state of residence.
Interest from an HYSA is taxed in the year it is earned or credited to the account. This applies regardless of whether the account holder withdraws the interest or lets it compound within the account. Unlike certain retirement accounts or investment vehicles that offer tax-advantaged growth or deferral, HYSAs do not provide such benefits.
Reporting HYSA Interest on Your Tax Return
Reporting HYSA interest on your tax return requires gathering documentation. Financial institutions typically issue Form 1099-INT, Interest Income, to account holders by January 31st each year. This form details the total interest earned during the previous calendar year, with the primary amount reported in Box 1.
Financial institutions typically issue Form 1099-INT for interest earned of $10 or more. However, all interest earned, even amounts less than $10, remains fully taxable and must be reported on your tax return. If you do not receive a 1099-INT but know you earned interest, use your account statements to determine the exact amount to report.
To report this income on your federal tax return, the total taxable interest from your 1099-INT (or bank statements) is entered on Line 2b of Form 1040. In some cases, you may also need to file Schedule B, Interest and Ordinary Dividends, with your tax return. Schedule B is generally required if your total taxable interest income for the year exceeds $1,500, or if you have a financial interest in or signature authority over a foreign financial account.
If Schedule B is necessary, you will list each payer and the amount of interest received from them. The total interest calculated on Schedule B is then carried over to Line 2b of your Form 1040. These steps ensure accurate reporting of earned interest income to the IRS.