The appeal of a high-yield checking account is the extra money it brings in, just like a savings account.
However, this raises a question. The interest you get from savings accounts qualifies as income, which means you have to pay taxes on it.
Is the interest you earn from a high-yield checking account also income? Do you need to pay high-yield checking account taxes? If you do, is there any way to avoid them?
We’ll review the answers to these questions and more and show you how to get a $200 bonus with MIDFLORIDA.
Start your application with MIDFLORIDA Credit Union.
Is high-yield checking account interest taxable?
Unfortunately, the IRS considers your interest taxable from a high-yield checking account.
How does the IRS tax high-yield checking accounts?
High-yield checking accounts are taxed in a way similar to savings accounts. You pay taxes on the interest paid on your account.
So if you have a MIDFLORIDA Credit Union High Yield Checking account with a 5.00% APY on balances up to $10,0002, you’ll pay taxes on all the interest you earn.
It’s worth pointing out that if you get a signing bonus for opening a high-yield checking account, you’ll also have to pay taxes on the amount of the bonus.
When do financial institutions issue a 1099?
You must report interest earnings yourself if your account earns less than $10.
However, if your account earns over $10, your credit union or bank should send you a form 1099-INT. Even if you don’t get a 1099-INT form, you’re still obligated to report your earnings.
Why open a high-yield checking account if you’re taxed on the interest?
When some people hear that the interest their high-yield checking account earns can be taxed, they get upset.
They might even wonder why they should open a high-yield checking account if they just have to turn that money over to the government.
If you’re nodding your head in recognition, remember two important facts:
- The interest you earn from a high-yield checking account won’t change your tax rate on other earnings.
- You’ll also only have to pay a percentage of your taxable earnings. You’ll still get to keep most of your money.
Can I avoid high-yield checking account taxes?
Unfortunately, paying taxes is inevitable. However, there are steps you can take to lower your taxable income.
Contribute to retirement accounts
Many retirement accounts, such as IRAs or 401(k)s, allow you to deduct your contributions from your earned income.
This can lower your taxes and be a great way to prepare for the future.
Put money in a Health Savings Account
Do you have a high-deductible health insurance plan with your employer?
If you do, you likely also have a health savings account (HSA). You can use this account to reduce your taxable income.
Contributions to your HSA are 100% tax deductible, which is especially helpful when employers match them.
Even better, you won’t be taxed on withdrawals from your HSA if you use the money to pay for qualified medical expenses.
Open an education-related account
If you have a child, help them pay their college tuition with an education savings account.
This could be either a Coverdell Education Savings account or a 529 plan.
Similar to a health savings account, any contributions you make are tax-deductible. You also won’t get taxed on the interest this account earns so long as you spend the money on education costs, such as:
- Tuition and fees
- School supplies
- Textbooks
- Academic tutoring
- Special needs services
You can even use the money to buy a computer and related services, like Internet access, when the account's beneficiary is in elementary or secondary school.
Invest in a MIDFLORIDA checking account today
MIDFLORIDA’s High Yield Checking account offers the potential for substantial earnings.
While the interest earned is taxable, it's important to remember that the benefits often outweigh the costs. You'll likely earn more from the interest than you'll pay in taxes, and your overall tax burden is unlikely to increase significantly.
However, you can do some things to lower your taxable income if you’d like to reduce your taxes, such as making contributions to several different accounts:
- IRAs
- Health savings accounts
- Coverdell education accounts
If you’d like to see how much you can earn from a MIDFLORIDA High Yield Checking account, contact our team today.
Want to get even more money?
New MIDFLORIDA members can get a $200 bonus when they sign up for a MIDFLORIDA Free Checking account if they meet the conditions.1
No matter which account you get, with MIDFLORIDA, you’ll also get the personal service many big banks lack today.
This blog provides general information and is not intended to be tax advice. You should consult a tax adviser for further information regarding tax matters.
