HYSA Taxes: Reporting High-Yield Savings Accounts as a Dependent
Understand how to report interest from high-yield savings accounts as a dependent, including tax forms, thresholds, and key considerations for compliance.
High-yield savings accounts (HYSAs) offer higher interest rates than traditional savings accounts, but those earnings are subject to taxes. For dependents—such as minors or students claimed on someone else’s tax return—accurate reporting is essential to avoid IRS issues.
Categorizing Interest Earnings
Interest earned from an HYSA is considered taxable and classified as ordinary income. It is taxed at the same rate as wages, whether withdrawn or left to compound.
For dependents, tax treatment depends on total unearned income. In 2024, up to $1,300 is tax-free. Earnings above this but below $2,600 are taxed at the dependent’s rate, while amounts beyond that are subject to the “kiddie tax,” which applies the parent’s tax rate to prevent income shifting.
Form 1099-INT and Reporting Requirements
Banks issue Form 1099-INT to account holders who earn at least $10 in interest during the tax year. This document is sent to both the taxpayer and the IRS. Even if a dependent does not receive a 1099-INT, all taxable interest must still be reported.
If total taxable interest exceeds $1,500, it must be reported on Schedule B (Form 1040). The IRS cross-checks tax returns with 1099-INT filings, so failing to report interest income can lead to penalties.
Some HYSAs offer bonuses, which are also reported on Form 1099-INT and classified as interest. If a financial institution misclassifies earnings, taxpayers may need to request corrections or clarify the reporting on their return.
Considerations for Dependents
Dependents may need to file a tax return if their unearned income exceeds IRS thresholds. Parents or guardians can sometimes report a dependent’s interest income on their own return using Form 8814, but this is only an option if the income remains below a set limit and consists solely of interest and dividends. Choosing whether to file separately or include the income on a parent’s return affects overall tax liability. Filing separately may lower the dependent’s tax rate but could also reduce eligibility for certain deductions or credits.
Dependents with significant HYSA interest may need to make estimated tax payments. Since interest income lacks automatic withholding, those with a total tax liability exceeding $1,000 after credits may need to pay quarterly estimated taxes to avoid penalties.
Federal and State Tax Differences
HYSA interest is taxed federally as ordinary income, with rates ranging from 10% to 37%. State taxation varies—some states tax interest fully, others exempt it, and some have no income tax at all.
States like Texas, Florida, and Washington do not impose personal income taxes, meaning HYSA interest is only subject to federal taxation. States such as California and New York tax interest as ordinary income, with top marginal rates of 13.3% and 10.9%, respectively.
Some states, including Indiana and Pennsylvania, tax interest but do not allow itemized deductions, limiting ways to offset earnings. Others, like Wisconsin and Colorado, follow federal deductibility rules. These differences mean dependents or their parents must review state tax laws carefully.
Penalties for Improper Reporting
Failing to report HYSA interest can result in additional tax assessments, penalties, and interest charges. The IRS cross-references tax returns with 1099-INT filings, making unreported interest easy to detect. If discrepancies arise, the IRS may issue a CP2000 notice, recalculating tax liability.
Underreporting or omitting HYSA interest can result in accuracy-related penalties of up to 20% of the understated tax. Intentional misreporting can lead to fines of up to 75% of the unpaid tax. Interest accrues on unpaid amounts from the original due date.
Dependents who fail to file a required return may also face a failure-to-file penalty, starting at 5% of unpaid taxes per month, up to 25%.