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

Interest earned from high-yield bank or credit union accounts is taxable as ordinary income. This includes interest from savings or checking accounts and yields on CDs. Some credit unions refer to the interest paid on deposit and share accounts as “dividends,” which the IRS also considers taxable interest.

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 1099-INT forms you’ve received, including those from non-high-yield savings accounts.
2. Enter your 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 income for the year, along with wages, tips, Social Security payments, and other income. After subtracting standard or itemized deductions, apply marginal tax rates to your taxable income to calculate the tax you owe. If you work with a tax preparer or use tax-preparation software, most of this detailed work will be done for you.

Determining 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 throughout the previous year. You should receive a separate 1099-INT from each financial institution that paid you at least $10 in interest. Each 1099-INT shows the interest you received from all of your accounts with that institution. The IRS receives a copy of your 1099-INTs as well, so it’s important to report your interest income accurately on your tax return.

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 during the year. If you think you should have received a 1099-INT, contact the financial institution and request one. With or without a 1099-INT, 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 might consider placing your savings in a tax-advantaged account to save on taxes. Options include:

• 401(k), 403(b), and other employer-sponsored retirement plans: In both traditional and Roth versions, your money grows tax-free while it’s in your account. Traditional plans let you deduct contributions in the year you make them, while Roth plans allow tax-free withdrawals upon retirement.
• Traditional and Roth IRAs: Similar to employer-sponsored plans, traditional and Roth IRAs earn interest tax-free while the money grows in your account.
• Health Savings Accounts (HSAs): If you have a qualifying high-deductible health plan, you can make a tax-deductible contribution to an HSA. Interest on your HSA balance is tax-free, as are qualified withdrawals.
• 529 Education Plans: When saving for college expenses in a 529 plan, your interest and gains are not taxed as your money grows. Withdrawals are tax-free if used for qualifying education expenses.

These tax-advantaged accounts have eligibility requirements, contribution limits, and restrictions on withdrawals. However, if your savings goals align, you can save on taxes and grow your money faster.

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 funneling some of your savings into tax-advantaged accounts to meet long-term savings goals and save on taxes.

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