A High Yield Savings Account A great way to put money aside for one urgent or short-term savings goals, such as a wedding or a new car. It’s low-risk, easy to access your funds and increases your money for interest payments. And Compared to regular savings accounts, this interest is large. The average interest rate on a regular savings account is currently around 0.37%, while the average interest rate on a high-yield savings account is around 3.5% to 4.5% (or more).
However, this interest does not come for free. You must report it to the IRS. Here’s what you need to know about taxes on high-yield savings accounts.
Explore your local high-yield savings options here to see how much interest you could earn
Do you pay taxes on a high-yield savings account?
Because savings accounts earn interest, the IRS considers them taxable income. This interest is taxed at your earned income rate — in other words, taxed at the same rate as your income. For tax year 2022, income tax rates range from 10% to 37%, depending on your tax bracket. Taxable interest accounts include savings accounts, Account checking, Money Market Account And Certificate of Deposit (CD).
You don’t have to pay taxes on your savings account balance, only on the interest your account earns. Because any money you put into the account should have been taxed upfront. So, if you have $5,000 in a high-yield savings account that earns 3.5% interest, you’ll only pay taxes on $175 of the interest, not $5,000. Interest is taxed whether you withdraw it from the account or not.
Some banks offer promotions for opening a new account with them. If you received a cash bonus from opening a high-yield savings account, that is also taxable and must be reported to the IRS.
Open a high-yield savings account online today and start earning more money.
How to report interest on high-yield savings accounts
At the beginning of each year, you’ll receive Form 1099-INT from each institution where you have a high-yield savings account — if you earned at least $10 in interest in the previous year. You must report this interest on your tax return, but you do not need to file Form 1099-INT. Your financial institution will send a copy to the IRS when they send it to you.
If you don’t receive a Form 1099-INT, you must report any interest you earned during the year, even if it’s only a few dollars. If you don’t, you may have to pay penalties and interest. You can find this amount by reviewing your bank statement.
Despite the tax on interest, The value of having a high yield savings account. Savings is a key part of any successful financial plan, and a High yield account Earns substantially more interest than a regular one. By divvying your money into one High Yield Savings Account and other financial products, such as retirement accounts and stocks, you can maximize your earnings, minimize your taxes, and ensure that your money is doing the most work for you, both in the short and long term.
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