The Implications of a High-Yield Year (Savings Accounts, CDs, Treasurys, etc.) on Your Taxes

As interest rates rise, high-yield savings accounts become more attractive to savers looking to earn more on their money. However, it’s essential to understand the tax implications of earning interest on these accounts.

Interest earned on savings accounts is taxable at ordinary income tax rates, meaning you’ll owe taxes on the interest you earn each year. This includes interest earned on certificates of deposit (CDs), money market accounts, Treasury bills, and other savings vehicles.

For example, if you earn $1,650 in interest from a high-yield savings account and fall into the 24% tax bracket, you would owe $396 to the IRS. This is taxed as ordinary income, which can be less favorable compared to capital gains tax rates on stocks and real estate.

It’s important to be prepared for tax season by monitoring your accounts regularly, making quarterly tax payments if necessary, and considering investing in an IRA to reduce taxable income. You’ll receive a Form 1099-INT from your bank or credit union early in the year if your account earns $10 or more in interest.

While high-yield savings accounts offer a safe and accessible place to save money, it’s crucial to weigh the tax implications and consider other tax-free or tax-deferred savings options. Consulting with an accountant or financial advisor can help you make informed decisions about your savings strategy and tax planning.

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