Introduction
Who would say no to extra income? Savings accounts are a great way to earn extra bucks via interest. If you have a high-yielding account, you can expect a good sum to be credited as interest to your account. But have you ever wondered: Do I get taxed on high-yield savings accounts? The answer is yes. The IRS taxes these accounts.
If you are planning to open a high-yield savings account, read on to learn all the tax rules you need to know.
Interest On Savings Accounts Is Taxable
As the interest on the savings increases, you’re owed more taxes. Interest on savings accounts is taxable. The Federal Reserve increased the federal funds rate 18 months ago, increasing interest rates on savings accounts and CDs. Some banks now offer high-yield savings accounts with 5% APYs or more. These rates were just 0.5% to 1% a few years ago. So, you can earn $500 a year instead of $50 to $100 on $10,000.
The interest you earn on HYSAs is undoubtedly taxable, as the IRS considers it your regular income, nothing different from the money earned at your job. You only pay taxes on the interest you earn from your savings account, not the balance.
The money you put into the account is already taxed. For example, if you have $5,000 in a high-yield savings account with 3.5% interest, you’ll owe taxes on $175 of interest, not the total $5,000. You pay taxes on the interest, whether you take it out or leave it in the account.
The bank sends a form at the end of the year mentioning details about how much interest you’ve earned. This form must be reported on your tax return.
Remember, choosing the best HYSA involves considering interest rates, fees, minimum balance, and accessibility. Beem can help you find a high-yield savings account that best suits your needs.
How Much Taxes Do You Pay On High-Yield Savings?
The amount of tax you’re supposed to pay on high-yield savings depends upon your tax income bracket. If you’re in a higher tax bracket, you’ll pay more. Generally, you’ll pay federal and state income tax on the interest earned from your high-yield savings account. For 2022, income tax rates ranged from 10% to 37%, depending on your tax bracket. You pay interest taxes from savings, checking, money market accounts, and CDs.
For instance, if you’re in the 22% tax bracket and earned $500 in interest from your high-yield savings account, you’d owe $110 in federal income taxes on that interest. Remember that income taxes vary by state, so you may owe additional taxes at the state level.
People Also Read – Pros and Cons of a High-Yield Savings Account.
Do You Pay Taxes On High-Yield Savings Accounts?
A high-yield savings account earns interest, which the IRS considers taxable income. Hence, taxes are essential to pay on high-yield savings accounts. The tax is paid only on the interest added to the savings, not the entire amount. This is why tax is payable on high-yield savings accounts so that the interest earned throughout the year can be recorded and tracked. You’ll need this information to report your income accurately during tax time.
Is There Any Downside To A High-Yield Savings Account?
While a high-yield savings account can be an easy way to earn more interest on your savings, it also has drawbacks. These may include a few cons, such as a minimum savings balance or limited access to your money.
With the right bank and facilities, checking out the fine print and understanding any fees related to the account is essential. Ensure the tax is only attached to the interest credited to your savings, not all of the savings in the account.
For more detailed information and steps to follow, check out the pros and cons of a high-yield savings account for more accurate information.
What Happens If You Put $50,000 In A High-Yield Savings Account?
If you put $50,000 in a high-yield savings account, you’ll earn more interest than a regular savings account due to the higher interest rate. So, before taking any further action, you must consider the tax implications of such a large deposit.
Assuming an annual interest rate of 1.5%, you could earn $750 in interest over one year on a $50,000 deposit. Remember, this interest is taxable income, so you must report it on your tax return and pay any applicable taxes.
People Also Read – Are High-Yield Savings Accounts Safe?
Conclusion
High-yield savings accounts can be a valuable and easy tool for growing interest in your savings, but it’s essential to understand their tax implications. So, in case you’re wondering, ‘Do I get taxed on high-yield savings accounts?’ The answer is ‘Yes.’
The interest you earn on HYSAs is taxable income, and you must report it on your federal and possibly state income tax returns.
Before opening a high-yield savings account, read the terms and conditions carefully, paying close attention to any applicable fees or restrictions. If you have questions about how a high-yield savings account could affect your taxes, consider consulting a tax professional for personalized advice. You can learn more about HYSAs on Beem.
By staying informed and making wise financial decisions, you can maximize your high-yield savings account while minimizing the impact on your taxes.
