Are High-Yield Savings Accounts Taxed?

How to Report High-Yield Savings Account Interest to the IRS

Preparing your own tax return? Grab your Form 1040 and all the 1099-INT forms you’ve received this year, including forms reporting interest income from accounts that are not high-yield savings. Follow these three steps:

1. Total the interest income from all 1099-INTs. Add any stray interest not reported on a 1099-INT, if you have any.
2. Enter your total interest income on line 2b of your Form 1040.
3. If you’ve earned $1,500 or more in taxable interest or dividends, also complete Schedule B, Interest and Ordinary Dividends.

The interest you report is added to your income for the year, along with your wages, tip income, Social Security payments and so on. After subtracting standard or itemized deductions, apply marginal tax rates (or tax brackets) to your taxable income to calculate the tax you owe. If you work with a tax preparer or use tax-preparation software, most of this detailed work on your tax return will be done for you.

How Do I Know How Much Interest to Report?

Your bank or credit union will issue a Form 1099-INT by January 31, showing the interest you’ve earned throughout the previous year. You should receive a separate 1099-INT from each financial institution that paid you at least $10 in interest. Each 1099-INT shows the interest you received from all of your accounts with that institution. The IRS receives a copy of your 1099-INTs as well, so it’s important to report your interest income accurately on your tax return.

If you received less than $10 in interest or didn’t receive a 1099-INT, check your account statements or online account to find out how much interest you earned during the year. If you think you should have received a 1099-INT, contact the financial institution and request one. With or without a 1099-INT, report the interest on your tax return, even if it’s only a few dollars.

Can I Avoid Paying Taxes on My Savings Account?

You can’t legally avoid paying taxes on savings account interest. But if you’re determined to save money on taxes, you might consider stashing your savings in a tax-advantaged account. Your options include:

• 401(k), 401(b) and other employer-sponsored retirement plans: In both traditional and Roth versions, your money grows tax-free while it’s in your account. Traditional retirement plans let you deduct your contributions in the year you make them. Roth plans let you withdraw your money tax-free when you retire.
• Traditional and Roth IRAs: As with employer-sponsored retirement plans, traditional and Roth IRAs earn interest (and gains) tax-free while the money grows in your account.
• Health savings accounts (HSAs): If you have a qualifying high-deductible health plan, you can make a tax-deductible contribution to an HSA that can be used to cover out-of-pocket healthcare expenses, health insurance deductibles and copays. Any interest you receive on your HSA balance is tax-free, as are qualified withdrawals.
• 529 education plans: When you save money toward college expenses in a tax-advantaged 529 plan, your interest and gains are not taxed as your money grows. You don’t get a tax deduction on your contributions but can withdraw your money tax-free as long as it’s used for qualifying education expenses.

These tax-advantaged accounts have eligibility requirements, contribution limits and restrictions on withdrawals that are important to observe—especially if your goal is to take advantage of tax benefits. However, as long as your savings goals align, you can save money on taxes and use the tax savings to grow your money faster.

The Bottom Line

If you earned interest in a high-yield savings account last year, tracking, reporting and paying taxes on your interest income isn’t difficult: Save your 1099-INTs, report taxable interest on your Form 1040 and complete your tax return. Going forward, you can consider funneling some of your savings into tax-advantaged accounts to meet long-term savings goals and save a few dollars on taxes.