Now, the high-yield savings accounts, CDs, and other interest-bearing accounts have been paying a higher APY over several years of rising interest rates. Your savings will benefit from this: earning more is always better than money left in an account with nearly 0% APY.
However, the minor problem about high interest rates is that they make you pay taxes on them. The incomes earned from your savings account (or any others) are not “free money”; they are taxablе interests. You will receive Form 1099-INT from your bank to help you report interest income when filing your tax return. Let's go through some reasons why you may find yourself faced with a surprise tax bill due to higher-than-normal interests received on your savings account – and what to do about it.
Interest income tax is calculated based on the marginal tax rate
The IRS views interest income as “ordinary income,” meaning that it treats it as similar to salary earnings. However, while salaries are taxed each month, taxable interest can be a shocker during taxation time. You might just discover you have several hundred or thousand dollars extra of income that you didn’t anticipate. Taxable interests from your saving account will attract the marginal tax rate (that is the same as your tax bracket). Thus, if one has $10K in a high-yield savings account paying 5.00% APY throughout all of 2023 then he/she will owe approximately $500 of taxable int