Saving cash when interest rates are high can give you an ‘endorphin high,’ but remember that the IRS will take a cut, says one tax expert.
From titans of finance to mom-and-pop investors, it’s easy to see why more people have been drawn to cash as interest rates have climbed and remain high.Prepping for the tax consequences of interest income has re-emerged recently on financial planners’ to-do lists, according to experts at banks, wealth advisory firms and major accounting firms.
The IRS treats interest earnings as ordinary income. It gets lumped with other money, like wages, that is subject to income tax rates running from 10% to 37%. The swirl of tax rules and market conditions may also mean more households will owe an additional 3.8% investment tax for these yields. Higher interest rates are putting a fresh twist on tax-efficient investment, said Robert Keller of KPMG, one of the “Big Four” accounting firms.
Meanwhile, the debate continues on whether the Federal Reserve will push interest rates any higher, and when rates will finally fall. On Nov. 1, the Fed kept its benchmark rate at a 5.25%-5.5% target range, a 22-year high. Shaving taxable income may be especially important for people nearing the threshold that triggers the Net Investment Income Tax of 3.8%.
Step 2: Remember that ‘asset location’ matters The value of “asset location” increases in the current moment, said Joel Dickson, Vanguard’s global head of advice methodology. Part of that has to do with the IRS’ underpayment penalty for households that pay too little in taxes as they go through the year.
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