Here’s one reason your tax bill could be bigger in 2023:

Often (but not always) the more money you earn, the more taxes you have to pay. Our tax system is made up of different tax brackets that impose higher tax rates as your income increases. (To be clear, the higher tax rates only apply to your highest incomes.)

But it’s not just the wages you earn from work that you have to pay taxes on. Any income you earn is what the IRS wants. And that includes the interest you earn on your savings accounts.

Meanwhile, savings accounts have been paying generously in 2023, with many high-yield accounts paying in the ballpark of 5% APY this year. But while that’s a good thing from an income perspective, your taxes may be higher in 2023.

Will I have to pay the IRS in early 2024?

The 2023 tax return deadline is April 15, 2024. And if you’ve been earning a lot of interest on your savings accounts in 2023, you could end up having to write a bigger check to the IRS than you deserve in the first few months of the new year. predicted.

There are two problems with interest income from savings. First, it is treated as ordinary income and taxed at the highest tax rate applicable to you.

Second, unless you make money. ton If you’re interested in your savings account, you likely won’t pay estimated taxes on that money during the year. But think about it. When you get paid from work, taxes are deducted. And if you earn a steady income from your side job, you’ll have to pay a portion to the IRS every quarter.

If you earned a significant amount of interest on your savings account this year but didn’t pay a portion of that sum to the IRS, you could face a notable tax bill in 2024.

How to Minimize Your Tax Burden

If you’ve added a few thousand dollars to your savings account this year, you could end up owing money to the IRS in 2024. But by taking a few strategic steps before taxes are due, you can minimize or even eliminate your tax bill altogether. Of the year.

One thing you might see is selling your investments in a brokerage account at a loss. You can use capital losses like these to offset up to $3,000 against your ordinary income. So let’s say you lost $3,000 but earned $3,000 in interest in 2023. Your losses may offset that interest income.

Another option is to contribute more money to your IRA, 401(k), or HSA. Doing so can help you shield more of your income from taxes, indirectly offsetting your interest income.

With IRAs and HSAs, you technically have to fund your accounts by next year’s tax filing deadline. But you only have until December 31 to complete funding your 401(k) for 2023 purposes.

Getting more interest on your money is a good thing. However, it’s important to realize that this could result in a higher tax bill.

If you think you can earn a lot of interest on your savings account in 2024, you may want to consider making estimated tax payments on that savings account each quarter. For example, if you’re talking about $1,000 in interest, you probably don’t need to do this. But if you’re earning 10 times as much in interest, it’s something to consider. Either way, it’s a good idea to talk to your accountant and get their opinion. This is especially true if you already have a tax professional you work with.

WARNING: The highest cash back card we’ve ever seen has a 0% introductory APR until 2025.

Using the wrong credit or debit card can result in serious costs. Our experts love this top pick, which features 0% introductory APR for 15 months, crazy cashback rates of up to 5%, and no annual fee, all of it.

In fact, this card is so good that our experts even use it personally. Click here to read the full review for free and apply in just 2 minutes.

Read reviews for free