Do You Have to Pay Taxes on a HYSA?

High-Yield Savings Accounts (HYSAs) have gained popularity as a tool for growing savings due to their competitive interest rates. Understanding the tax implications of the interest earned from these accounts is important for account holders. The interest generated by an HYSA is generally considered taxable income by federal and most state governments, regardless of whether the funds are withdrawn or remain in the account.

Understanding HYSA Interest Taxability

Interest earned on High-Yield Savings Accounts is considered taxable income by the Internal Revenue Service (IRS). This interest is typically treated as “ordinary income,” similar to wages or other forms of regular income you might earn. The amount of tax owed on this interest income depends on your overall federal income tax bracket, which is determined by your total taxable income from all sources. As your total income increases, your tax bracket may rise, potentially leading to a higher tax rate on your interest earnings. The interest becomes taxable in the year it is credited to your account, even if you do not withdraw it. This means that if interest is paid into your HYSA in December, it counts as income for that tax year, even if you only access the funds the following year. This applies to interest earned from both HYSAs and traditional savings accounts.

Reporting Your HYSA Interest

Financial institutions report interest earnings to both the IRS and the account holder. If you earn $10 or more in interest from a single financial institution within a calendar year, the bank will issue you a Form 1099-INT, “Interest Income.” This form provides a summary of the interest earned during the previous tax year and is typically mailed to account holders by January 31st. Even if you earn less than $10 and do not receive a 1099-INT, all interest earned is still considered taxable income and must be reported to the IRS.

To report this income on your federal tax return, you will typically use the information from your Form 1099-INT. The total taxable interest, usually found in Box 1 of the 1099-INT, is reported on Line 2b of your Form 1040. If your total taxable interest income from all sources exceeds $1,500, you will also need to complete Schedule B, “Interest and Ordinary Dividends,” and then transfer the total from Schedule B to your Form 1040. It is important to accurately report all interest income, as the IRS receives a copy of the 1099-INT from your bank, and discrepancies can lead to inquiries.

State-Specific Tax Considerations

While federal tax rules for HYSA interest apply nationwide, state income tax rules can vary. Most states that impose an individual income tax will also tax interest earned from HYSAs. These states often align their tax treatment of interest income with federal guidelines, considering it as ordinary income. However, some states may have different rules or exemptions for certain types of interest income. For example, interest income from U.S. government obligations is generally exempt from state-level taxation, but this exemption typically does not extend to HYSA interest. It is advisable to consult your specific state’s tax laws or seek guidance from a tax professional to understand the precise implications for your HYSA interest earnings.