Do You Have To Pay Taxes on a High-Yield Savings Account?

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High-yield savings accounts (HYSA) help you grow your long-term savings. The accounts are as safe and accessible as traditional savings accounts, but they pay higher interest.

But do you pay taxes on a high-yield savings account? The interest you earn can have tax implications you should be aware of before you open your first high-yield savings account.

Are High-Yield Savings Accounts Taxed?

The short answer is yes. The interest you earn from your high-yield savings account is taxed as income. But that shouldn’t deter you from opening one — it’s still a great way to boost your savings.

While your savings won’t appreciate in value as dramatically as an investment account might, your funds are covered by FDIC or NCUA insurance, up to the coverage limits that apply.

Additionally, interest rates are about as high as they’ve been in over 20 years, and the best high-yield savings accounts are paying 4.50% APY or more.

How Interest Earned on High-Yield Savings Accounts Is Taxed

Interest earnings on a high-yield savings account are taxed as ordinary income. This means that the interest you earn on these accounts gets taxed by the federal government, but the amount you owe depends on your IRS tax bracket. Generally, the higher your income, the higher your tax bracket and the more tax you could owe on interest earned.

For example, let’s say you earned $500 from your HYSA in the 2024 tax year and you’re in the 24% federal income tax bracket. This means you’d owe $120 in federal income taxes.

Despite the tax, your high-yield savings account will earn more in interest than a standard savings account.

Do State Taxes Apply to High-Yield Savings Account Interest?

Depending on where you live, you may also owe state income tax on interest unless your state does not tax interest income. Here are the states that don’t tax interest income:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

New Hampshire doesn’t have a state income tax, but it does currently tax interest and dividend income. However, the state will phase this tax out by 2025.

The states that do tax interest income tax it as ordinary income, although tax rates vary by state. Some states, like Colorado and Illinois, have a flat income tax rate. Other states, like California and New York, have a graduated income tax where higher income levels are taxed at higher rates.

What Forms Are Required for Reporting High-Yield Savings Interest?

Interest earned on high-yield savings accounts is taxed as earned income and must be reported to the IRS. If you earn at least $10 in interest, your financial institution will report your earnings to the IRS on Form 1099-INT. Earnings of less than $10 should still be reported on your tax return.

Are There Ways to Minimize Taxes on High-Yield Savings Interest?

There are ways to potentially avoid or minimize high-yield savings account taxes. Here’s how to avoid tax on savings accounts:

• Health savings account (HSA): HSAs are tax-advantaged savings accounts that allow you to earn interest tax-free as long as you use the money to pay for qualified medical expenses. Make sure you don’t exceed the HSA contribution limit as there could be penalties.
• 529 college savings plan: Interested earned from a 529 savings plan may not be taxed if withdrawn earnings are used to pay for qualified educational expenses.
• Retirement savings: Interest earned from IRAs or 401(k)s is tax-deferred. You can grow your investments tax-free until you make withdrawals.

High-Yield Savings Accounts for Children: Are They Taxed Differently?

Yes, high-yield savings accounts for children are taxed differently because the interest income is subject to kiddie tax rules. Here’s how it works, per IRS rules:

• If the child’s unearned income totals more than $2,500, it may be subject to a specific tax.
• If the child’s only income is interest and dividend income and totals less than $12,500, the parent may be able to elect to include that income on their return rather than file a return for the child.

In either scenario, the child is required to file a return. Use IRS Form 8615 to figure out the child’s tax on unearned income over $2,500 if the child is under 18 and in certain situations if the child is older. The child may also be subject to net investment income tax (NIIT). This is a 3.8% tax on the lesser of net investment income or the excess of modified adjusted gross income over a certain threshold amount. Use Form 8960 to calculate this tax.

If the parent includes the child’s income on their tax return, attach Form 8814 to Form 1040, Form 1040-SR or Form 1040-NR.

Should I Put My Money in a High-Yield Savings Account?

While there are tax implications, a high-yield savings account could be a good choice if you want to earn decent rates while maintaining easy access to your money. But it’s not your only option. If you won’t need your money for a while, consider opening a CD account instead. You could earn an even higher rate.

When saving for the long term, an individual retirement account might be a good option. You can use an IRA to invest in a money market fund that earns competitive rates with little risk to your investment. You’ll pay a penalty if you withdraw the funds before you turn 59 1/2; in the meantime, your contributions are a tax write-off — you won’t pay tax on them or the interest they earn until you withdraw money in retirement.

Josephine Nesbit and Quinlan Grim contributed to the reporting for this article.

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