3.24.2025 -- The Federal Reserve held interest rates steady again in March, and while markets continue to debate when and how quickly cuts might come, one fact remains: cash is still earning real yield. Many investors are seeing 4.2%-4.5% returns on short-term instruments like Treasury bills and money market funds.
That's been a welcome shift after years of near-zero rates. But this tax season, some families are finding those returns come with a twist: higher-than-expected 1099s.
Why It's Showing Up Now
2023 was the first full calendar year in over a decade where interest income made a noticeable contribution to many portfolios. For those holding sizable amounts of cash in brokerage accounts, taxable money market funds, or directly in Treasury securities, that income is now part of the tax picture.
It's not new—but for many, it hasn't been relevant for a long time.
What's Taxable (and What's Not)
Here are a few facts that clients and advisors are navigating right now:
- Money market mutual funds distribute dividends that are typically taxed as ordinary income at both the federal and state levels.
- Treasury bills, notes, and bonds are subject to federal income tax but are exempt from state and local income tax. This can be especially useful for investors in high-tax states.
- Municipal money market funds may offer interest income that is exempt from federal tax, and sometimes from state tax as well—depending on where the investor resides and where the bonds were issued.
- Tax-advantaged accounts—like IRAs, Roth IRAs, and HSAs—allow interest and dividends to grow tax-deferred or tax-free, depending on the account type and withdrawal rules.
These distinctions have always existed, but with yields back at meaningful levels, they've become much more relevant.
A Common Theme This Season
Many high-earning families are surprised to see how much taxable interest income accumulated last year—especially when their overall investment activity didn't feel particularly eventful. For some, it's prompting broader conversations about asset location, cash strategy, and coordination between tax and investment planning.
Additional Consideration for Complex Structures
For families using trusts, donor-advised funds, or multi-generational entities, the placement of interest-bearing assets can affect both current and future tax exposure. Income retained in certain types of trusts may be taxed at compressed brackets, while assets held in charitable vehicles or tax-exempt accounts may avoid annual taxation altogether. These decisions often depend on broader planning goals and are typically reviewed in collaboration with tax advisors.
Final Thought
After a long period where cash "didn't matter much," we're in a different environment. Earning 4.5% on liquid assets is meaningful—but so is understanding how that income fits into the bigger picture.
As tax season continues, many families are revisiting how their cash is held, where interest is earned, and how investment decisions intersect with planning. It's not just about what you earn—it's also about where and how it's taxed.