How Much Tax Do You Pay on a High-Yield Savings Account?
Discover the tax realities of high-yield savings accounts. Learn how interest income affects your tax obligations.
Discover the tax realities of high-yield savings accounts. Learn how interest income affects your tax obligations.
High-yield savings accounts (HYSAs) offer higher interest rates than traditional savings accounts, making them an attractive option for savers. Interest earned from these accounts is considered taxable income by the Internal Revenue Service (IRS).
Interest earned from a high-yield savings account is categorized as ordinary income. It is taxed at your regular federal income tax rate, similar to wages or salary. There is no special lower tax rate for HYSA interest, unlike qualified dividends or long-term capital gains.
All interest income is taxable, regardless of the amount. Financial institutions are required to report interest payments to the IRS and to you if the total interest earned in a calendar year is $10 or more. Even if you earn less than this threshold and do not receive a tax form, the income is still considered taxable and must be reported on your tax return. This is often referred to as “de minimis” interest.
If you earn $10 or more in interest during a calendar year, your bank will issue you a Form 1099-INT, “Interest Income.” This form is sent to account holders by January 31st of the following year, with a copy also sent to the IRS.
The Form 1099-INT details the amount of interest income you received, usually in Box 1. This information is crucial for accurately preparing your federal income tax return. You will use the amount from Box 1 of your 1099-INT forms to report your taxable interest.
For most individuals, interest income is reported directly on Form 1040. However, if your total taxable interest income from all sources exceeds $1,500, or if certain other conditions apply, you will need to complete and attach Schedule B (Interest and Ordinary Dividends) to your tax return. Schedule B allows you to list the sources and amounts of your interest income in detail. Even if you do not receive a 1099-INT because your interest earned was less than $10, you are still responsible for reporting that income.
For the majority of individuals, the tax due on high-yield savings account interest is paid annually when they file their federal income tax return, Form 1040. This payment is typically due by the tax deadline, which is generally April 15th of the year following the tax year. The interest income is simply added to your other taxable income, and the total tax liability is calculated.
Individuals who anticipate owing at least $1,000 in tax for the current year, after accounting for withholding and credits, may need to make estimated tax payments throughout the year. This applies if your withholding and refundable credits are expected to be less than 90% of the tax for the current year, or 100% of the tax shown on your prior year’s return (110% if your prior year’s adjusted gross income exceeded $150,000). Estimated taxes are typically paid quarterly using Form 1040-ES, with due dates usually in April, June, September, and January of the following year. Making these timely payments helps avoid potential underpayment penalties.