Here’s why 2023 could bring some unpleasant tax surprises.

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Prepare now to avoid being thrown out later.

The advantage of keeping your money in a savings account instead of the jar next to your bed is that you can earn interest (not to mention minimizing the risk of losing money). For years, banks paid meager interest rates. But last year, interest rates on savings accounts and certificates of deposit (CDs) began to skyrocket. While this is good in theory, it could be a tax headache this year.

Don’t be surprised if your tax bill is high

The IRS gets a cut of every income you earn. Earn as a salaried worker or a side job? The IRS gets the cut. Do you make money investing in a brokerage account? The IRS charges capital gains tax on your profits.

Similarly, any interest earned on a savings account or CD is considered income. Also, many earned more interest last year than they did years ago, so many will owe his IRS more for that income in 2022.

So don’t be shocked if you find that you’ve paid more in taxes because you’ve earned more money in your savings. You should also know that interest earned from a savings account or CD is taxed as regular income. That is, it is taxed at the same rate as a regular salary. This is another reason why the higher the interest rate, the higher the tax.

Should I avoid keeping money in savings due to tax implications?

Any money you have on hand for emergencies or short-term goals, like buying a house or dream vacation, should be kept in a savings account (or sometimes a CD). That way, you can earn interest on it, and you may not be tempted to indulge in less important things.

The fact that you have to pay taxes on your interest income can be annoying. But that’s no reason to avoid putting money in savings accounts or CDs.

Think of it this way. If he makes $120,000 a year, he will pay more taxes than someone who makes $20,000 a year. But is the fact that your salary is $100,000 higher a bad thing?

Likewise, earning more interest on your savings than before is a good thing. After all, this is basically like getting free money at no risk (assuming you put your cash in an FDIC-insured bank and the deposit is no more than $250,000). But it’s also important to understand the tax implications.

You may get less taxes refunded this year because you made more money in your savings. Depending on your complete tax situation, you may even have to write a small check to the IRS. But don’t withdraw money from the bank for that.