Understanding and Reporting High-Yield Savings Account Interest

Interest earned from high-yield savings accounts, whether at a bank or credit union, is considered taxable income by the IRS. This includes interest from savings or checking accounts and yields on CDs. Some credit unions refer to the interest paid on deposit and share accounts as “dividends,” but the IRS treats this as taxable interest as well. In this blog, we will guide you through the process of reporting high-yield savings account interest to the IRS and explore ways to potentially reduce your tax burden.

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

If you are preparing your own tax return, you will need your Form 1040 and all the 1099-INT forms you have received throughout the year. These forms report interest income from all your accounts, not just high-yield savings. Follow these steps to report your interest income:

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

The interest you report is added to your total income for the year, along with wages, tips, Social Security payments, and other income. After subtracting standard or itemized deductions, apply the marginal tax rates to your taxable income to calculate the tax you owe. If you use a tax preparer or tax-preparation software, most of this detailed work 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 earned during 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 your accounts with that institution. The IRS also receives a copy of your 1099-INTs, so it is crucial to report your interest income accurately on your tax return.

If you received less than $10 in interest or did not receive a 1099-INT, check your account statements or online account to find out how much interest you earned during the year. If you believe you should have received a 1099-INT, contact the financial institution and request one. Regardless of whether you receive a 1099-INT, report the interest on your tax return, even if it is only a few dollars.

Can I Avoid Paying Taxes on My Savings Account?

Legally, you cannot avoid paying taxes on savings account interest. However, if you are looking to save money on taxes, consider placing your savings in a tax-advantaged account. Here are some options:

• 401(k), 403(b), and other employer-sponsored retirement plans: In both traditional and Roth versions, your money grows tax-free while it is in your account. Traditional retirement plans allow you to deduct your contributions in the year you make them, while Roth plans let you withdraw your money tax-free when you retire.
• Traditional and Roth IRAs: Similar to 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 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 for college expenses in a tax-advantaged 529 plan, your interest and gains are not taxed as your money grows. While you do not get a tax deduction on your contributions, you can withdraw your money tax-free as long as it is 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 is not difficult. Save your 1099-INTs, report taxable interest on your Form 1040, and complete your tax return. Going forward, consider funneling some of your savings into tax-advantaged accounts to meet long-term savings goals and save a few dollars on taxes.

At O1ne Mortgage, we understand the importance of managing your finances effectively. If you have any questions or need assistance with your mortgage needs, do not hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate the complexities of mortgage services and ensure you make the best financial decisions for your future.