You cannot avoid paying tax on savings interest, but you can reduce how much you owe

The IRS taxes all interest your savings account earns as ordinary income. There is no legal way to make that interest disappear from your tax return. What you can do instead is move money into accounts or investments that produce less taxable interest, or that defer taxes to a later year, or that generate tax-free growth in specific situations.

The most common mistake people make is thinking they can simply not report the interest. Banks send the IRS a copy of the 1099-INT form they send you, so the IRS already knows what you earned. Failing to report it triggers an automatic mismatch notice and penalties.

If your savings account earned less than $10 in interest during the year, you do not have to report it on your return. Below that threshold, the bank may not even send you a 1099-INT. But if you earned $10 or more, you must report it, and you owe tax on the full amount.

Key Takeaways

  • All savings account interest is taxable income and must be reported to the IRS on your tax return, regardless of the amount.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means you owe more tax, but the after-tax return is often still better than a regular account.
  • Money market accounts, certificates of deposit, and Treasury bills all produce taxable interest just like savings accounts do.
  • Tax-advantaged accounts like Roth IRAs and 529 plans can grow without producing taxable interest, but they have contribution limits and withdrawal rules.
  • If you are in a low tax bracket, you may owe no federal tax on interest income below a certain threshold, depending on your filing status and other income.

Why high-yield savings accounts still make sense even though the interest is taxed

A high-yield savings account might earn 4% to 5% annual interest right now, while a traditional savings account earns 0.01% or less. The interest on the high-yield account is fully taxable, but even after you pay tax on it, you come out ahead.

If you earn $1,000 in interest at 5% and you are in the 22% federal tax bracket, you owe $220 in federal tax. Your after-tax return is $780. In a traditional account earning 0.01% on the same balance, you would earn roughly $1 in interest and owe almost nothing in tax. The high-yield account is still the better choice by a wide margin, even after taxes.

The tax you owe depends on your total income and filing status. If you are single and earn less than $11,600 in 2024, you may owe no federal tax at all, even on interest income. If you earn more, your tax bracket determines how much of that interest you keep. State income tax also applies in most states, which can add another 3% to 10% depending on where you live.

Tax-advantaged accounts that let interest grow without annual tax bills

A Roth IRA lets you contribute up to $7,000 per year (or $8,000 if you are 50 or older). Any interest, dividends, or investment gains inside the account are never taxed, and you can withdraw the money tax-free after age 59½, as long as the account has been open for at least five years. The catch is that you cannot touch the money before retirement without penalties, and you can only contribute if your income is below a certain limit.

A 529 college savings plan works similarly for education expenses. You contribute after-tax dollars, but the money grows tax-free inside the account. When you withdraw it to pay for college tuition, room and board, or other may have access to education costs, you owe no tax on the growth. If you withdraw money for something other than education, you pay tax on the earnings plus a 10% penalty, though some exceptions exist for K-12 tuition and student loan repayment.

A Health Savings Account (HSA) is triple tax-advantaged: you get a tax deduction for contributions, the money grows tax-free, and withdrawals for may have access to medical expenses are tax-free. You must be enrolled in a high-deductible health plan to open one, and you can only contribute if you have no other health coverage. The annual contribution limit is $4,150 for individual coverage or $8,300 for family coverage in 2024.

Treasury bills and bonds as a lower-tax alternative

U.S. Treasury bills, notes, and bonds earn interest that is subject to federal tax but exempt from state and local income tax. If you live in a high-tax state like California or New York, this can save you 5% to 10% on your tax bill compared to a savings account.

A Treasury bill (T-bill) is a short-term loan to the federal government that matures in four weeks to one year. You buy it at a discount and receive the full face value at maturity; the difference is your interest. A Treasury note runs two to ten years, and a Treasury bond runs 20 to 30 years. All three are backed by the full faith and credit of the U.S. government, so the credit risk is zero.

The interest on Treasuries is still taxable federal income, so they do not eliminate your tax bill. But the state tax savings can be meaningful. A person in the 24% federal bracket plus a 9.3% state bracket pays 33.3% total tax on savings account interest. On Treasury interest, they pay only 24% federal tax, saving 9.3 percentage points. On $10,000 in interest, that is $930 in tax savings.

Money market accounts and certificates of deposit

A money market account is a hybrid between a checking account and a savings account. It typically earns higher interest than a regular savings account, sometimes close to what a high-yield savings account offers. The interest is fully taxable, just like any other savings account. The main difference is that money market accounts usually come with check-writing privileges and a debit card, so you can access your money more easily.

A certificate of deposit (CD) is a fixed-term savings product where you agree to leave your money untouched for a set period—three months, six months, one year, five years, or longer. In exchange, the bank pays you a higher interest rate than a regular savings account. The interest is fully taxable in the year you earn it, even if you do not withdraw the money until the CD matures. If you withdraw money early, you pay a penalty, usually equal to a few months of interest.

CDs are useful if you know you will not need the money for a specific period and want to lock in a may provide rate. They are not useful for tax avoidance—the interest is taxable either way.

What happens if your interest income crosses certain thresholds

If you are a dependent on someone else's tax return and your interest income exceeds $1,250 in 2024, your parents or guardians may have to file a separate tax return for you. If your total unearned income (interest, dividends, and capital gains combined) exceeds $1,250, you may owe the kiddie tax, which taxes the excess at your parents' tax rate rather than your own, usually resulting in a higher bill.

If you are married filing jointly and your combined interest income exceeds $1,000, you must report it on Schedule B of your tax return. If you earn less than $1,000, you can report it directly on line 2b of Form 1040 without filing Schedule B.

If you earn more than $200,000 in income as a single filer (or $250,000 married filing jointly), you also owe a 3.8% Net Investment Income Tax on your interest, dividends, and capital gains. This is a separate tax on top of your regular income tax.

Strategies that do not work and why people think they do

Some people believe they can avoid reporting interest if they keep their balance below a certain amount. This is false. The IRS does not care how much money is in the account—only how much interest it earned. A $100,000 account earning $10 in interest is just as taxable as a $1,000,000 account earning $10,000.

Others think they can avoid taxes by moving money between accounts or banks. Moving money does not create new interest; it just moves the same dollars around. The interest is taxed in the year you earn it, regardless of which account holds the money on December 31.

Some people believe that if they do not withdraw the interest, they do not have to report it. This is also false. You owe tax on interest in the year you earn it, whether you withdraw it or leave it in the account to compound. The IRS calls this "constructive receipt"—the money is yours to use, so it is taxable, even if you choose not to touch it.

How to report savings interest on your tax return

Your bank will send you a 1099-INT form by January 31 if you earned $10 or more in interest during the year. The form shows the total interest in box 1. You report this amount on Schedule B (Form 1040), Part I, line 1, or directly on Form 1040 line 2b if you have less than $1,500 in interest income and no other investment income.

If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add up all the interest from all the forms and report the total on your return. If you lose a 1099-INT or do not receive one, contact the bank and ask for a copy. Do not guess or estimate the amount.

If the 1099-INT shows an amount that does not match your records, contact the bank immediately to correct it. If you report a different amount than what the bank reported to the IRS, the IRS will send you a notice asking for an explanation. It is easier to fix it before you file.

Frequently Asked Questions

Can I put money in a savings account under someone else's name to avoid taxes?

No. You owe tax on interest you earn, regardless of whose name is on the account. If you put money in an account under your child's name, your child owes tax on the interest, not you. If you put money in an account under a spouse's name, your spouse owes tax on that interest. You cannot transfer a tax bill to someone else by changing whose name appears on the account.

What if I earn interest but do not receive a 1099-INT form?

You still owe tax on the interest and must report it on your return. The bank is required to send a 1099-INT if you earned $10 or more, but if they fail to do so, that does not erase your tax obligation. Contact the bank and ask for a corrected form. If they cannot provide one, report the interest based on your own records and keep documentation in case the IRS asks questions.

Is interest from a savings account at a credit union taxed differently?

No. Interest from a credit union savings account is taxed the same way as interest from a bank savings account. Credit unions are not-for-profit institutions, but the interest their members earn is still ordinary taxable income. The credit union will send you a 1099-INT just like a bank does.

Can I deduct the taxes I pay on savings interest?

No. Interest income is taxable, but you cannot deduct the tax you owe on it. You can only deduct investment expenses like advisory fees or custodial fees if they exceed 2% of your adjusted gross income, and even then, only if you itemize deductions rather than taking the standard deduction. Most people take the standard deduction, so this deduction is rarely useful.

What if I move money to an offshore account to avoid U.S. taxes?

You still owe U.S. tax on the interest. U.S. citizens and residents must report worldwide income, including interest earned in foreign accounts. Failing to report foreign interest is tax evasion, which carries criminal penalties including fines and imprisonment. If you have a foreign account with more than $10,000 at any point during the year, you must also file an FBAR (Foreign Bank Account Report) with the Treasury Department.