Do You Pay Taxes on a High-Yield Savings Account?

A High-Yield Savings Account (HYSA) offers an opportunity to earn more on your deposited funds than a traditional savings account. The interest generated by an HYSA is generally considered taxable income. Understanding these tax obligations is important for managing your finances effectively.

Understanding HYSA Interest as Taxable Income

Interest earned on a savings account, including an HYSA, is generally classified as ordinary income by the Internal Revenue Service (IRS). This means the interest is added to your other income sources, such as wages, and is taxed at your regular federal income tax rate. These rates can vary widely, typically ranging from 10% to 37%, depending on your total taxable income and filing status for the year. The specific tax bracket you fall into directly influences the amount of tax you will owe on your HYSA interest.

The interest earned is taxed in the year it is credited to your account, not when you choose to withdraw the funds. Even if you leave the interest in the account to compound, it is still considered received for tax purposes in that tax year. Most states also consider HYSA interest taxable income, so state income taxes may apply in addition to federal taxes, depending on where you reside.

Receiving Your Tax Information

Your financial institution provides the necessary tax documentation for your HYSA interest. If you earn $10 or more in interest from a single financial institution within a calendar year, the bank is required to issue you Form 1099-INT, “Interest Income.” You can expect to receive this form by January 31st of the year following the tax year in which the interest was earned.

Form 1099-INT typically includes details such as the payer’s (bank’s) name, your taxpayer identification number, and the total amount of interest earned in Box 1. Even if you earn less than $10 in interest and do not receive a Form 1099-INT, all interest earned is still considered taxable income and must be reported to the IRS. You can find the exact amount of interest earned on your year-end account statements or by accessing your online banking portal.

Reporting HYSA Interest on Your Tax Return

The information provided on your Form 1099-INT is used to report your HYSA interest on your federal income tax return. If your total taxable interest income from all sources exceeds $1,500, you will need to complete Schedule B, “Interest and Ordinary Dividends,” and attach it to your Form 1040. The total interest calculated on Schedule B then flows to Line 2b, “Taxable interest,” of your Form 1040.

If your total taxable interest income is $1,500 or less, you can report the amount directly on Line 2b of Form 1040 without needing to file Schedule B. When using tax preparation software, you will input the information from your Form 1099-INT, and the software will populate the necessary forms. If you are preparing your return manually, you will enter the amounts as instructed. State tax forms may also require similar reporting of your HYSA interest income.