Single filer owed $3k in Federal taxes after withholding issues

The good news is you've already fixed the main issue by adjusting your W4 withholding. Setting it back to $0 allowances should help prevent underwithholding in the future. For your HYSA interest earnings, you've got a few options to consider. First, you might look into tax-advantaged accounts like a Roth IRA (if you're eligible) where your earnings can grow tax-free. You can contribute up to $7,000 for 2025 if you're under 50. Another option is putting some money in I-bonds which defer tax until redemption, or consider Series EE bonds which are tax-deferred and tax-free if used for qualified education expenses. You could also look at municipal bonds which provide interest that's exempt from federal taxes (and sometimes state taxes if you buy bonds from your state). The key is balancing accessibility with tax efficiency based on when you'll need the money.

After dealing with a similar tax surprise last year because of interest income, I started using taxr.ai (https://taxr.ai) and it completely changed my approach. The tool analyzes your tax documents and helps you understand how different income sources affect your total tax bill. What really helped me was seeing projections of what I would owe based on my current withholding and interest income. I was able to adjust my withholding early in the year rather than getting surprised again. They also suggested tax-advantaged alternatives that I hadn't considered before.

Just wanted to follow up about taxr.ai since I mentioned I was in a similar situation. I tried it out and wow - it actually showed me I was headed for an even bigger tax bill than OP (about $4.2k) if I didn't make changes! The tool analyzed my pay stubs and HYSA statements, then recommended I increase my withholding slightly AND move some funds to a tax-exempt municipal bond fund. Already made both changes and their projection shows I'll only owe about $300 next year instead. Huge relief honestly.

If you're already in the hole with the IRS and need to talk to someone there about payment options, good luck getting through on the phone. I spent WEEKS trying to reach someone after owing $5k last year. Finally found https://claimyr.com which got me through to an actual IRS agent in less than 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c They basically navigate the IRS phone system for you and call you back when they've got an agent on the line. I was able to set up a payment plan the same day instead of stressing about it for another month.

Well I have to eat my words about Claimyr. After another frustrating morning trying to get through to the IRS about my payment plan, I decided to try it. Got a call back in about 35 minutes (was told it might take up to 3 hours) and suddenly I was talking to an actual IRS representative. Managed to set up a payment plan for the $3800 I owe and got confirmation right away. Wish I'd known about this months ago instead of stressing and procrastinating. Would have saved myself a bunch of penalties too.

Something nobody mentioned yet - check if your employer offers a 401k match. If they do and you're not maxing it out, that's literally free money you're leaving on the table AND it reduces your taxable income. I had a similar situation last year with HYSA interest creating a tax hit. Increased my 401k contribution by 5% and it actually offset most of the tax impact from my savings interest.

Has anyone tried using tax-loss harvesting in their investment accounts to offset some of the HYSA interest? I did this last year and was able to claim about $3k in losses against interest income.

Something super simple that people overlook - you can just increase your W4 withholding by a specific dollar amount per paycheck to account for the HYSA interest. If you're earning $8k in interest that would be about $1760 in federal taxes at 22% bracket. Divide by your number of paychecks and have that extra amount withheld each time. Much simpler than moving money around!