My 2023 Tax Bill Was Higher Than Expected for This Big Reason. Will It Impact You, Too?

Tax season is upon us -- as I write this, there's just a little over a month left until the April 15 tax-filing deadline. I was extremely motivated to get my taxes done ASAP this year, and in fact, submitted all of my paperwork to my accountant at the beginning of February. My eagerness was not for the same reason as many Americans (the prospect of a fat tax refund), but because I'm finally ready to buy a house. I needed two years of tax returns showing solid self-employment income to qualify for a mortgage.

My tax return is now done and filed, and I was not at all surprised to owe money to Uncle Sam as well as my state of residence -- my quarterly estimated tax payments were based on 2022 income, and 2023's was higher. But my accountant also called out another big reason for my higher tax bill: the interest I earned on the cash in my high-yield savings account (HYSA). Did you earn interest in a bank account last year? Then this article is for you.

Did you have a HYSA, CD, or MMA last year?

I started throwing house money into my high-yield savings account in the fall of 2022. I kept it up for the duration of 2023, and I'm still saving in 2024. My savings account pays interest to me on the same day every month, and I love logging in to see how much I got. I ended up racking up almost $1,900 in interest on the account in 2023.

If you had cash in a high-yield savings account, certificate of deposit (CD), or money market account (MMA) in 2023, you may also owe money as a result (unless you can offset it in another way, such as credits and deductions). The same is true if you scored a sweet bank account bonus in 2023. The money is considered taxable income, and the amount you'll owe is determined by your federal tax bracket.

This isn't to say these accounts aren't worth opening, of course -- I was absolutely delighted to earn so much on my savings last year, and I really hope my account keeps the same APY (or higher) for the duration of 2024, too. (This will depend on whether we see Federal Reserve rate cuts, and how big they are.) But it's a good idea to plan for any extra taxes you might owe as a result.

How can you plan for a higher tax bill?

If you earned interest on a savings account, CD, or money market account last year, you likely have a 1099-INT form waiting for you in your bank account's web portal. You'll need to refer to this form when filing your return using tax software (or send it to your tax preparer, if you're like me and would prefer to outsource this annual task). It'll show how much you earned throughout the year.

It's a good idea to look up your federal tax bracket to see what percentage you can expect to owe of the interest or bonus you received. You can set this amount aside in preparation to pay Uncle Sam. In my case, I have a dedicated tax payments sub-account in my savings, because I'm a freelancer and expected to pay taxes every quarter. I take a percentage off the top of everything I earn and stick it there, so it's always ready. As such, my higher tax bill this year was an annoyance rather than a crisis.

If you're one of the 31% of Americans taking advantage of high-yield savings accounts with rates over 4%, a higher tax bill might be a fly in the ointment of interest payments. Find out how much you might be on the hook for, and aim to either offset it with credits and deductions, or prepare to cough up what you owe. And enjoy your account for as long as you can keep that high APY -- even if you owe more in taxes as a result.