Understanding Taxable Interest from High-Yield Savings Accounts

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

Interest earned from high-yield savings accounts, whether from a bank or credit union, is considered taxable income. This includes interest from savings or checking accounts and yields on CDs. Some credit unions refer to this interest as “dividends,” but the IRS still considers it taxable.

Here’s a guide on how to report interest income from high-yield savings accounts on your tax return.

Steps to Report High-Yield Savings Account Interest

If you’re preparing your own tax return, follow these steps:

1. Total the interest income from all your 1099-INT forms, including any stray interest not reported on a 1099-INT.
2. Enter the total interest income on line 2b of your Form 1040.
3. If you’ve 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. After subtracting standard or itemized deductions, apply marginal tax rates to calculate the tax you owe. If you use a tax preparer or tax-preparation software, most of this 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’ve earned in the previous year. You should receive a separate 1099-INT from each financial institution that paid you at least $10 in interest. The IRS also receives a copy of your 1099-INTs, so it’s crucial to report your interest income accurately.

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. If you think you should have received a 1099-INT, contact the financial institution and request one. Report the interest on your tax return, even if it’s only a few dollars.

Can I Avoid Paying Taxes on My Savings Account?

Legally, you can’t avoid paying taxes on savings account interest. However, you can consider placing your savings in tax-advantaged accounts to save on taxes. Options include:

• 401(k), 403(b), and other employer-sponsored retirement plans: Both traditional and Roth versions allow your money to grow tax-free. Traditional plans let you deduct contributions in the year you make them, while Roth plans let you withdraw money tax-free upon retirement.
• Traditional and Roth IRAs: These accounts also allow your money to grow tax-free.
• Health Savings Accounts (HSAs): If you have a high-deductible health plan, you can make tax-deductible contributions to an HSA. Interest earned is tax-free, as are qualified withdrawals.
• 529 Education Plans: Save for college expenses in a tax-advantaged 529 plan. Interest and gains are not taxed, and withdrawals are tax-free if used for qualifying education expenses.

These accounts have eligibility requirements, contribution limits, and withdrawal restrictions. Ensure your savings goals align with these accounts to maximize tax benefits.

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 straightforward: Save your 1099-INTs, report taxable interest on your Form 1040, and complete your tax return. Consider using tax-advantaged accounts to meet long-term savings goals and save on taxes.

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