(Bloomberg) — Savers who benefited from the high interest rates offered by savings accounts and high-yield certificates of deposit last year are waking up to a bigger tax bill from Uncle Sam.
With US taxes due on April 15, many taxpayers are facing a higher tax liability on the interest they've earned through these accounts, potentially reducing their tax refund or even pushing them into a higher tax bracket.
Taxpayers are aware that they are making money in those accounts, but the reality hits you hard when you look at your consolidated 1099 brokerage statements or receive 1099-INT tax forms from banks and other financial institutions and see just how big the amount is. it is,” said Miklos Ringbauer, founder of accounting and tax strategy firm MiklosCPA.
When the Congressional Budget Office last updated its projections, it projected that taxpayers would report $282 billion in taxable interest and dividend income in tax year 2023, up from $237 billion in 2019, the last year for it. which actual total is available.
For years, rates on savings accounts were close to zero. But after the Federal Reserve began raising the benchmark federal funds rate in 2022, many financial institutions raised the yields offered on cash and cash-like investments, offering savers a way to earn a good yield while staying liquid. .
A big beneficiary of the change has been Goldman Sachs Group Inc.'s Marcus High-Yield Online Savings Account, which is currently offering an annual percentage yield of 4.5%. According to data from Bankrate, the average rate on a high-yield savings account was 4.33% in 2023, 1.09% in 2022 and just 0.38% in 2021.
“High-yield savings accounts have been a safe way to earn a good return, but it's also more 'expensive' from a tax perspective,” said Alvina Lo, chief wealth strategist at Wilmington Trust. “Interest is taxed as ordinary income, which is a higher rate than earnings from other types of investments that may be taxed at long-term capital gains rates.”
For example, a single filer who earned $5,000 in interest in 2023 would owe about $1,600 in federal taxes if he or she is in the 32% income tax bracket. By comparison, the same person would likely pay a long-term capital gains tax of 15% on $750 if they had a $5,000 gain on a stock owned for more than a year.
For CDs, any interest earned is taxable each year, even if the CD does not mature for several years. But where investors won't have to pay interest tax is if CDs or other interest-earning investments are held in a tax-deferred retirement account like an IRA. The tax on those accounts comes when the money is finally withdrawn.
To contact the author of this story:
Suzanne Woolley in New York at (email protected)