With higher interest rates being earned on savings accounts, facing tax can be a possibility!
Following recent Federal Reserve Interest Rate increase, many Americans are earning more money on their savings accounts, but this can lead to unexpected tax. Therefore, it’s important to be prepared and find ways to manage taxes better.
According to Catherine Valega, founder of Green Bee Advisory and IRS enrolled agent, “So many people were shocked by their cash interest earned”. Interest earned from savings accounts or certificates of deposit (CDs) is taxed as income, which varies according to your federal income tax bracket. As of May 17th, the top 1% average rate for savings accounts is 4.94%, and the highest-paying 1-year CDs offers 5.51%, according to DepositAccounts.
Certified financial planner and director at Mariner Wealth Advisors in Greenville – South Carolina, Ashton Lawrence, advises people to assess how much cash they need to keep on hand and consider if it’s wise to invest some of it elsewhere. Maintaining an emergency fund that covers three to six months of living expenses, is definetly wise. But if your looking into exploring investment options that can reduce taxes, there are a few to consider.
Municipal Bonds
Experts recommend that higher earners look into municipal bonds, muni bond funds, or muni money market funds. These investments offer lower interest, once it is free from federal taxes, and you might also avoid state and local taxes. However, be aware that muni bond interest can potentially increase your Medicare Part B premiums.
“One of the best options available (for tax-advantaged cash)”, says Andrew Herzog, a certified financial planner and an associate wealth advisor at The Watchman Group in Plano – Texas.
Treasury Bills
Unlike Municipal Bonds, Treasury Bills (T-bills) income is subject to federal taxes, but is exempt from state and local taxes. Their terms range from one month to one year. “This really matters in high-income tax states like California, New York and others”, adds Thomas Scanlon, a certified financial planner at Raymond James in Manchester – Connecticut.
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