5 tax tips for high-yield savings accounts

If you have a high-yield savings account (HYSA), chances are you’re the kind of person who likes things buttoned up. You compare your options. You notice when rates move. You enjoy knowing your money is working for you, accruing compound interest while it’s sitting in your account.

Even savvy savers often overlook one aspect of HYSAs: taxes. You may already know that the interest you earn on your HYSA is taxable – but did you know that your HYSA can be a useful tool in planning and managing your tax strategy?

Keep reading for some tax tips related to high-yield savings accounts.

HYSA Tax Tip #1: Remember that HYSA interest is taxable

Just like the salary from your job, the money you earn in a HYSA is subject to federal (and often state) income tax. Interest income is taxed in the year you earn it, even if you don’t withdraw the money from your account.

Banks are required to report interest payments to the IRS, and you’re required to report interest income on your federal tax return. If you earned $10 or more in interest during the tax year, your bank will send you IRS Form 1099-INT detailing exactly how much interest you were paid. These forms are typically issued in late January.

CIT Bank customers can expect to receive form 1099-INT by mail and can view or download electronic copies in the Document Center within online banking or the CIT Bank mobile app.

Even if you don’t receive Form 1099-INT (for example, you earned less than $10 in interest from a specific bank), you are still legally required to report all interest income on your tax returns.

HYSA Tax Tip #2: Grow your tax refund in your HYSA

Approximately two-thirds of Americans who file individual tax returns receive a refund. If you’re among them, this means that you paid more in taxes than you owed that year.

The good news: You’ll receive a refund after filing your tax return, assuming you don’t owe the IRS money from previous years.

The bad news: The IRS doesn’t pay interest on the money you overpaid to the government that resulted in your tax refund, so you essentially gave the government an interest-free loan.

It’s tempting to treat it as "found money" and splurge, but savvy earners know this is a prime opportunity to accelerate financial goals. To make the most of your money, deposit your tax refund into your HYSA and let it grow over time. You might choose to keep it in a dedicated account for future tax expenses or use it to bolster your emergency fund.

IRS Form 8888, which you can file along with your Form 1040 (Individual Income Tax Return) allows you to split your federal tax refund among multiple bank accounts in case you need some of your refund money for other expenses.

You can reduce future tax overpayments by adjusting the amount that your employer withholds from your paychecks; consult your tax advisor for guidance.

HYSA Tax Tip #3: Use your HYSA for estimated quarterly taxes

If money is hitting your bank account without any taxes taken out, you’re responsible for making sure the IRS gets its portion along the way.

For many Americans, this means paying taxes four times a year – in April, June, September and January. Common examples of people required to pay estimated quarterly taxes include self-employed workers such as freelancers, contractors, consultants and small business owners whose income isn’t subject to automatic tax withholding by an employer. Taxpayers with significant non-wage income such as investment gains, rental income, royalties or taxable retirement withdrawals may also be required to pay quarterly estimated taxes.

A high-yield savings account is an excellent tool for managing quarterly tax obligations. It’s a secure place to keep and grow your money until your IRS payments are due. Opening a HYSA specifically for taxes helps keep this money separate from your regular savings and spending money, streamlining your recordkeeping and reducing the likelihood you’ll spend the money on household expenses before your quarterly tax bill comes due.

Each time you get paid, deposit a portion of the money you earn into your HYSA. When the next quarterly payment deadline comes along, you’ll be ready to pay the IRS without affecting your budget or dipping into your long-term savings. The additional money you earn from interest can help offset your tax expenses and related costs such as accounting services or filing fees.

HYSA Tax Tip #4: Save for your annual tax return

There are many reasons you might end up owing taxes when you file your annual return. Even if your employer withheld taxes from your paycheck, it’s common for the math to not align perfectly. This can happen if you adjusted your withholdings to increase your monthly cash flow or if you realized significant capital gains during the year – for example, if you sold property or earned money in the stock market.

Instead of scrambling at the last minute, use your HYSA as a strategic reserve.

1. Calculate the amount due: Use a tax calculator or consult your CPA to get a rough estimate of what you might owe.

2. Set a monthly goal: Divide that number by the months remaining until the deadline.

3. Automate the transfer: Schedule an automatic transfer from your checking account to your HYSA each month.

Earning interest on money earmarked for the IRS is a small but satisfying win. It turns a future obligation into a present-day asset, maximizing every dollar until it leaves your account.

HYSA Tax Tip #5: Organize tax money with savings buckets

One of the best features of modern online banking is the ability to create sub-accounts or "buckets" within a single savings account. This is a game-changer for organization. Instead of having one giant pool of money where your emergency fund mixes with your vacation fund and your tax savings, you can separate them visually.

CIT Bank customers with Platinum Savings or Savings Connect accounts can create and use up to 10 savings buckets per account with SmartSaver.

Savings buckets can help you organize money within your account, earmarking funds for various financial goals and customizing the amount and timeline for each bucket. This separation keeps your budgeting clean and prevents you from accidentally dipping into funds that are spoken for. When tax time rolls around, you won't have to wonder if you have the cash — you’ll see it sitting right there in its dedicated bucket, ready to go.

Here are two ways to use savings buckets for tax planning:

1. Create a tax bucket in your HYSA. With savings buckets, you can keep your money organized without creating a separate account just for taxes. Estimate how much you’ll need for quarterly or annual tax payments, and make that amount the goal for your bucket. If your finances are fairly straightforward, a single tax bucket within your regular HYSA may be sufficient.

2. Create multiple buckets for different types of taxes. For many Americans, federal income tax is one of many tax obligations. If you’re required to pay state or local taxes, property tax or other types of tax, savings buckets can help you keep all of those liabilities organized within a single HYSA.

Make your money work as hard as you do

Tax season doesn't have to be a source of anxiety. With the right tools and a bit of foresight, it can be a time to reinforce your financial health. A HYSA offers the perfect blend of growth, security and flexibility to manage both your tax obligations and your refunds.

Whether you’re saving up to pay Uncle Sam or deciding where to park a refund check, the goal remains the same: Keep your money secure and keep it growing. Take a moment today to log into your account, check your settings and ensure your savings strategy is ready for whatever this tax season brings.