Tax Implications on High-Yield Savings Accounts and CDs

If you opened a high-yield savings account or certificate of deposit (CD) in recent years, you may be enjoying bigger cash yields due to higher-than-usual interest rates. Since March 2022, the Federal Reserve raised key interest rates 11 times to help combat inflation. While this has led to higher costs for mortgages, auto loans, and credit cards, it has also resulted in higher interest rates—and higher earnings—on balances in savings accounts and CDs.

For example, in May 2019, regular savings accounts earned an average of just .10% annual percentage yield (APY). Today, the average savings rate is closer to .47%, according to the FDIC. For those with high-yield savings accounts and CDs, that amount is even greater—with some rates reaching 4% APY or higher. Which means an account with $10,000 can earn $400 a year (at 4% APY) in interest. However, just like with all income, as your earnings rise, so may your tax bracket and the amount of taxes you owe the Internal Revenue Service (IRS).

If you earned more in savings this year with a high-yield savings account or CD (or are interested in these types of accounts to take advantage of high rates), read on to find out more about how this money is taxed—and the implications your earnings may have on your taxes.

Savings accounts

A savings account is designed to let you store your money securely while offering you interest on the funds in your account. The advantages of a savings account are that there are usually zero to low fees to open accounts and it’s easy to access your money from banks or ATMs without penalty (although there may be fees to take out money from a savings account at an ATM that's out-of-network).

A high-yield savings account is similar to a traditional savings account, except this type of account offers higher-than-usual interest rates—as much as 10 or 12 times the national average of regular savings accounts—which helps the money in your account to grow even faster.

When it comes to taxes, you only need to pay taxes on the interest earned on the account, not the entirety of the savings account balance. (Any money you deposit into your accounts should have already been taxed.)

This means, if you have $10,000 in a high-yield savings account that earns 4% interest, you’re only required to pay taxes on $400 in interest—not the total $10,000. Keep in mind that interest earned on an account is taxed whether or not it is withdrawn from the account (unlike investments like stocks, which are only taxed when sold).

If a person earns more than $10 in interest in a calendar year with a savings account, the IRS requires them to report this income on your tax return. Your bank will send you Form 1099-INT with the information you’ll need to file your taxes. If you don’t receive this form, you can still find the amount of total interest to report to the IRS by reviewing your bank statements.

Certificates of deposits (CDs)

A certificate of deposit (CD) is a type of bank account that lets you save a certain amount of money for a fixed period of time, such as six months, one year, or five years. Any money deposited into this account must remain in the account for the entirety of the CD term; early withdrawals normally result in lost interest or penalty fees. In exchange for this restriction, CDs usually offer higher interest rates than normal savings or checking accounts.

If you need regular access to your money, traditional or high-yield savings accounts might be preferable because these types of accounts allow for withdrawals or additional deposits. However, if you don’t mind having your funds committed for several months or years, you can usually earn more from CDs with larger interest rates offered by banks to make up for the loss of flexibility.

Like income or interest earned from a savings account, CD interest is also taxed like ordinary income. Similar to savings accounts, the interest will be taxed in the year that it's earned, not in the year you withdraw it. Your bank will send you Form 1099-INT by January 31 with info on your earned interest to file taxes. (If you don’t receive a form, refer to your CD maturity notices and end-of-year reporting statements.)

Considerations to remember

Interest rates rose in 2023, which means you may have earned more money from savings accounts and CDs last year than you have in the past. And, because most people don’t pay estimated taxes throughout the year on interest earned from saving accounts and CDs, there is the possibility of receiving a lower refund amount or even needing to pay a balance depending on how much interest you earned. However, because of both the federal tax system and State of Hawaii tax system is progressive, the likelihood that the interest you earned will significantly change your tax bill is low, and will typically be far outweighed by the amount you can earn in interest on one of these accounts.

It may be prudent to enlist the help of a tax professional who can help you protect your refund or offset a tax bill by identifying deductions and credits of which you may not be aware. Financial experts can also help create a plan to optimize your finances that can allow you to better reach your goals while enabling you to take advantage of interest rates on high-yield savings accounts and certificates of deposit.

To explore self-service tools for taxpayers and business owners, visit the IRS website. To learn more about what bank accounts can help you reach your financial goals, book an appointment today.

Bank of Hawaii does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.