Do You Pay Taxes on a High-Yield Savings Account?
Understand the tax implications of your high-yield savings account interest and how to report it accurately.
High-Yield Savings Accounts (HYSAs) offer a compelling option for individuals seeking to grow savings faster than traditional accounts. These accounts provide higher interest rates, making them attractive for short-term savings goals or emergency funds. Understanding the tax implications of interest earned from HYSAs is important for proper financial planning and tax compliance.
How HYSA Interest is Taxed
Interest earned from a High-Yield Savings Account is considered ordinary income by the Internal Revenue Service (IRS) and is taxable. It is subject to federal income tax at your marginal rate, similar to wages or salaries. This applies regardless of whether the interest is withdrawn or allowed to compound.
The IRS classifies this interest as ordinary income because it represents a return on your deposited capital, not a capital gain from an asset sale. This is consistent with other interest income sources like certificates of deposit (CDs) or money market accounts. In addition to federal taxes, the interest earned may also be subject to state and local income taxes, depending on your jurisdiction.
Reporting HYSA Interest on Your Tax Return
Financial institutions are required to report interest income to both the account holder and the IRS. If you earn $10 or more in interest from an HYSA within a calendar year, your bank will issue Form 1099-INT, “Interest Income.” This form details the interest paid to you.
You must report this interest income on your federal income tax return. If your total taxable interest income from all sources exceeds $1,500 for the year, you will need to file Schedule B, “Interest and Ordinary Dividends,” with your Form 1040. If your total interest income is $1,500 or less, you can report it directly on Form 1040 without needing to file Schedule B.
Key Details for HYSA Tax Reporting
Even if your earned interest is less than the $10 threshold for receiving a Form 1099-INT, the income is still taxable and must be reported to the IRS. Taxpayers are responsible for accurately reporting all interest earned, even if no tax form is issued by the financial institution. You can find the total interest earned on your monthly or annual account statements.
Beyond federal obligations, state and local income taxes may also apply to HYSA interest. Consult your state’s tax regulations for additional reporting requirements or liabilities. For joint HYSA accounts, interest earned is split equally between account holders for tax purposes. Each account holder is responsible for reporting their portion of the interest income on their individual tax return.