YIJHU FFHCD AEXFS rates soared for savers in 2023. Prepare for a tax hit this year.

Savers who diligently sought out attractive interest rates in 2023, enjoying levels of about 5% or higher on certificates of deposit (CDs), are now facing the less pleasant task of dealing with taxes.

In the previous year, those who secured a 5% rate on $10,000 in savings for the entire year earned $500 in interest, while those with $100,000 earned $5,000. However, as tax season approaches, many may be unaware that the interest earned on their CDs and high-yield savings accounts is taxable on their 2023 federal income tax returns, due by April 15.

Here are some key points regarding the taxation of CD interest:

  1. Issuance of 1099-INT: Savers holding a CD will receive a 1099-INT from the financial institution by January 31, with possible receipt by mid-February. Even if the interest is below $10, the bank is not required to issue a 1099, but reporting the interest income is still mandatory.
  2. Surprises and Misconceptions: Some savers might be surprised by the 1099-INTs they receive, assuming that interest on CDs or bonds is only taxable upon cashing. The form will detail interest earned on the CD from the purchase date to December 31.
  3. Exceptions: Interest on U.S. savings bonds, specifically inflation-indexed savings bonds like I Bonds, remains untaxed until the bond is cashed. Additionally, interest on CDs or bonds held in tax-deferred retirement accounts, such as IRAs, is not taxed annually; instead, taxes are levied upon withdrawal.
  4. Tax Impact: The tax impact will be more significant for those who pursued higher yields in 2023. Savers are advised to plan for potential new tax consequences, especially those who took advantage of higher yields with CDs and money market accounts.
  5. Tax Hit Variability: The size of the tax hit will vary based on factors such as the amount saved, interest rates received, and the individual’s federal income tax rate, which can range from 10% to 37%.

As interest rates experienced a notable climb, reaching levels not seen in 15 years, savers are urged to be aware of the tax implications associated with their interest earnings and plan accordingly. The impact will be more pronounced for those who actively sought higher yields, requiring careful consideration and preparation for potential tax liabilities.

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