How Much Tax Do You Pay On A High-Yield Savings Account?
High-yield savings accounts offer higher interest rates than typical savings accounts. However, the majority of Americans aren’t taking advantage of these potential gains, choosing traditional savings accounts instead. While the tax on interest earned is certainly something to consider, a high-yield savings account can still be an excellent option for many.
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Paying Income Taxes on Interest
Different accounts and investment products can incur a variety of different taxes, including capital gains, income and other taxes. Interest from any account or product is considered income and taxed accordingly, whether from a high-yield savings account, traditional savings account, certificate of deposit or other similar options.
This means the tax rate for any given account holder will depend on their federal and state income tax brackets.
Federal Income Tax
Account holders will have to pay federal income tax on interest based on that tax year’s rates for their bracket. Those brackets vary depending on income and also whether they are a single filer, filing jointly, or as a head of household. Here are the federal income tax brackets at rates for tax year 2024:
Tax Rate | Single Filers | Married Individuals Filing Joint Returns | Heads of Households |
|---|---|---|---|
10% | $0 to $11,600 | $0 to $23,200 | $0 to $16,550 |
12% | $11,601 to $47,150 | $23,201 to $94,300 | $16,551 to $63,100 |
22% | $47,151 to $100,525 | $94,301 to $201,050 | $63,101 to $100,500 |
24% | $100,526 to $191,950 | $201,051 to $383,900 | $100,501 to $191,950 |
32% | $191,951 to $243,725 | $383,901 to $487,450 | $191,951 to $243,700 |
35% | $243,726 to $609,350 | $487,451 to $731,200 | $243,701 to $609,350 |
37% | Over $609,350 | Over $731,200 | Over $609,350 |
Keep in mind that there are a variety of tax deductions to factor into calculating taxes as well, such as the standard deduction.
State Income Tax
High-yield savings account interest is also subject to state income tax where applicable. However, the specifics vary widely from state to state, with seven states collecting no state income tax at all. The account holder’s state can have a major impact on their overall tax on high-yield savings accounts.
Of the remaining 43 states, all except Washington, which only taxes capital gains for individual income, collect state income tax on interest. That also includes the District of Columbia.
In California, the highest tax bracket has a rate of 13.3%. On the other end of the spectrum, North Dakota has a top bracket of just 2.9%. There are 13 states where a flat tax rate is applied without brackets, although one of those is Washington, which doesn’t tax interest.
An account holder’s tax bracket and state of residence can dramatically change the tax rate they pay on interest, potentially making alternative products more appealing than high-yield savings accounts.
Reporting High-Yield Savings Account Interest
As with any other income, tax filers are responsible for reporting their high-yield savings account interest. The income is included when filing the regular annual tax return. Banks make this process as straightforward as possible by sending account holders 1099-INT forms, which must be sent by the bank by Jan. 31.
That 1099-INT form provides the total interest accrued over the previous year, which can then be included in Form 1040 of the account holder’s tax return, the proper form for taxable interest.
Attaching a Schedule B form is required for anyone with taxable interest earnings of $1,500 or greater. Banks are only required to send a Form 1099-INT for account holders with interest earnings of $10 or more. However, the IRS technically still requires any interest to be reported, no matter how little.
Minimizing Taxes on High-Yield Savings Interest
Options such as an individual retirement account or other tax-advantaged accounts can help investors reduce the taxes they pay on a variety of investments. While not all IRAs offer access to high-yield savings accounts, some do.
The interest can continue to grow over the years without incurring taxes until the IRA distribution, which is often within a lower income bracket. A Roth IRA is another potential option to leverage high-yield savings accounts for long-term growth while minimizing taxes.
Making the Most of High-Yield Savings Accounts
Account holders must pay income tax on interest earned with high-yield savings accounts. However, tax-sheltered accounts are an option to avoid this, and in many cases, a high-yield savings account could be the right choice even with taxes. A good high-yield savings account can still be part of a solid financial plan.
This article originally appeared on GOBankingRates.com: How Much Tax Do You Pay On A High-Yield Savings Account?
