Interest earned from high-yield savings accounts is considered taxable income by the IRS. This includes interest from savings or checking accounts and yields on CDs. Some credit unions refer to this interest as “dividends,” but it is still taxable. In this article, we will guide you through the process of reporting high-yield savings account interest to the IRS and explore ways to save on taxes through tax-advantaged accounts.

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

When preparing your tax return, you will need your Form 1040 and all 1099-INT forms received throughout the year. Follow these steps to report your interest income:

1. Total the interest income from all 1099-INTs. Include any additional interest not reported on a 1099-INT.
2. Enter your total interest income on line 2b of your Form 1040.
3. If you 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 your taxable income to calculate the tax owed. 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 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 is important to report your interest income accurately.

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

Can I Avoid Paying Taxes on My Savings Account?

While you cannot legally avoid paying taxes on savings account interest, you can consider using tax-advantaged accounts to save on taxes. Here are some options:

• 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 they are made, while Roth plans allow tax-free withdrawals during retirement.
• Traditional and Roth IRAs: Similar to employer-sponsored plans, these accounts earn interest tax-free while the money grows.
• Health Savings Accounts (HSAs): If you have a qualifying high-deductible health plan, you can make tax-deductible contributions to an HSA. Interest earned is tax-free, and qualified withdrawals are also tax-free.
• 529 Education Plans: Contributions to these plans are not tax-deductible, but interest and gains are tax-free if used for qualifying education expenses.

These accounts have eligibility requirements, contribution limits, and restrictions on withdrawals. Ensure your savings goals align with these accounts to take full advantage of the tax benefits.

The Bottom Line

Reporting and paying taxes on high-yield savings account interest is straightforward: save your 1099-INTs, report taxable interest on your Form 1040, and complete your tax return. To save on taxes in the future, consider using tax-advantaged accounts to meet long-term savings goals.

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