The days when stashing money under the mattress seemed like a viable and smart move may never return. Few people go so far as to keep cash in their houses, but many aren’t quite happy with the low interest rates and high service fees charged by financial institutions.
As banks profit from lending out your money, it only makes sense to expect a reasonable piece of the cake.
Enter high yield savings accounts.
Not only are these accounts safer, but they also offer higher interest rates than conventional savings accounts. Your funds in a high yield savings account are readily accessible should an emergency arise.
But do you pay taxes on a high yield savings account? The short answer is yes.
According to the IRS, any time funds in your bank account earn interest, the interest is taxable. That’s because interest income is treated the same as your work paycheck or earnings from your business.
Why Pay Tax on Savings?
As previously highlighted, high yield savings accounts attract tax.
Before you start second-guessing your decision of opening a high yield account, know that this isn’t a ploy by banking institutions to rob you of your hard-earned money—it’s the law.
In short, you will have to pay regular income tax on any interest that you earn from the money you deposit into your high yield savings account during the year.
Bear in mind that this is regardless of whether you move the money to another account, withdraw it, or keep it in the account.
At the end of the year, you will have to include your interest on savings in your tax return.
The Tax Paying Process Explained
Just like with any other form of income tax, the IRS imposes a taxable threshold on interest income earned in high yield saving accounts.
As a general rule of thumb, taxes are payable if you earn more than $10 in interest within a year.
Since high yield savings accounts offer high returns, most savers would have earned more than $10 by year-end. In such cases, your bank will usually send you a 1099-INT form.
If you don’t get the form automatically, it’s best to request the form and declare your savings interest, even if it seems like chump change.
Most states use a progressive tax rate system, where the tax rate percentage increases as your taxable income increases. In a nutshell, the more income you earn, the higher the percentage.
Usually, the rates can range anywhere from 10% to 37%.
Conclusion
If you’re considering opening a high yield savings account, the thought of paying tax on savings interest may not sound entirely appealing.
True, you have to pay taxes on your interest income if you earn more than $10 in a year. Seasoned savers, however, agree that the advantages associated with opening a high yield account outweigh the minor speed bumps of paying taxes.
Ultimately, such accounts allow you to easily reach your personal financial milestones, be it saving for a car, vacation, or making a down payment on your dream home.
If you aim to save or invest for the long-term or you’re not keen on paying tax on your interest earnings, you may need to explore other savings options, such as tax-free savings accounts.
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