The main ways to lower what you owe on savings interest
You can reduce taxes on savings account interest by moving money into accounts that don't generate taxable interest, by spreading interest income across multiple people, or by timing withdrawals to stay below income thresholds that trigger higher tax brackets. The most common method is opening a high-yield savings account at a bank or credit union, which earns more interest than a regular savings account but is still taxed the same way — the difference is you're earning enough to make tax planning worthwhile. Other options include certificates of deposit (CDs), money market accounts, and I Bonds, each with different tax treatment.
The amount you can actually save depends on your tax bracket, how much interest you earn, and whether you have other income. Someone in the 22% tax bracket who earns $500 in savings interest will owe roughly $110 in federal tax on that interest alone. The same person earning $5,000 in interest could owe $1,100. The strategies below work best when you have a substantial balance or multiple accounts generating interest.
Key Takeaways
- High-yield savings accounts earn more interest than regular savings accounts, but the interest is still taxable — the benefit is having more interest to work with when planning your taxes.
- I Bonds are backed by the federal government and the interest is not taxed at the state or local level, which saves money if you live in a high-tax state.
- Putting savings in a spouse's name or a minor child's account can shift interest income to someone in a lower tax bracket, though there are limits and rules that apply.
- Keeping your total interest income below $10 means you don't have to report it to the IRS, but most people earning meaningful interest will exceed this threshold.
- Tax-advantaged retirement accounts like IRAs and 401(k)s let interest grow without any annual tax, though you pay tax when you withdraw the money in retirement.
Using I Bonds to avoid state and local taxes on interest
I Bonds (Series I Savings Bonds) are issued by the U.S. Treasury and earn interest that is exempt from state and local income tax. You only pay federal tax on the interest when you cash the bond in or it matures. If you live in a state with high income tax — California, New York, or Massachusetts, for example — this can save you 5% to 10% of your interest earnings.
I Bonds have limits and restrictions. You can buy a maximum of $10,000 per person per calendar year through TreasuryDirect.gov. The bonds must be held for at least one year before you can cash them, and if you cash them before five years, you lose the last three months of interest as a penalty. The interest rate changes every six months based on inflation, so the return is not fixed. For someone with $50,000 to invest, I Bonds are not a complete solution, but they work well for a portion of your savings.
Moving money into tax-deferred retirement accounts
A traditional IRA or 401(k) lets interest and investment earnings grow without any tax each year. You don't report the interest on your tax return, and you don't pay tax until you withdraw the money in retirement. This is the most powerful tax tool available for savings, because it defers tax indefinitely rather than just reducing it.
The catch is contribution limits and access. For 2024, you can put up to $7,000 per year into a traditional IRA (or $8,000 if you're 50 or older), and $23,500 into a 401(k) (or $31,000 if you're 50 or older). You cannot withdraw the money before age 59½ without paying a 10% penalty plus income tax, with a few exceptions for hardship or first-time home purchase. If you need the money within the next few years, a retirement account is not the right tool. If you have a long time horizon and steady income, maxing out a retirement account is usually the single best way to reduce taxes on interest.
Shifting interest income to a spouse or dependent child
If you're married and file jointly, you can put savings in your spouse's name if your spouse has little or no other income. The interest is then taxed at your spouse's rate rather than yours. If your spouse is retired or not working, they may be in a lower tax bracket or have room to earn interest tax-free up to the standard deduction ($14,600 for a single filer in 2024).
For minor children, the rules are stricter. Interest earned by a child under 18 is taxed at the child's rate up to a threshold (called the "kiddie tax"), after which it's taxed at the parent's rate. For 2024, a child can earn up to roughly $1,300 in interest income before owing any federal tax. This works if you have a child with a small balance, but it's not a strategy for moving large amounts of money. You also cannot simply give money to a child and take it back — the money must genuinely belong to the child, and you cannot control how it's spent without losing the tax benefit.
Keeping interest income below reporting thresholds
If your total interest income for the year is $10 or less, you don't have to report it to the IRS. This is a hard floor — you still owe tax on the interest, but you don't file a form for it. In practice, this threshold is so low that almost anyone with a meaningful savings balance will exceed it.
A more useful threshold is the standard deduction, which is $14,600 for a single filer and $29,200 for a married couple filing jointly in 2024. If your total income (including interest) is below the standard deduction, you owe no federal income tax at all. This works if you have no other income and live entirely on savings, or if you're retired with very little pension or Social Security. For most working people, this is not a practical strategy because they already exceed the standard deduction from their job.
Comparing savings vehicles and their tax treatment
| Account Type | Interest Taxed Annually? | State/Local Tax? | Withdrawal Restrictions | Best For |
|---|---|---|---|---|
| High-yield savings account | Yes, at ordinary income rate | Yes | None (FDIC insured up to $250k) | Emergency funds, short-term goals |
| Money market account | Yes, at ordinary income rate | Yes | Limited withdrawals per month | Slightly higher rates than savings |
| CD (certificate of deposit) | Yes, at ordinary income rate | Yes | Early withdrawal penalty if cashed before maturity | Locking in a fixed rate for a set period |
| I Bond | Yes, federal only (when cashed) | No | Must hold 1 year; lose 3 months interest if cashed before 5 years | Long-term savings in high-tax states |
| Traditional IRA | No (tax-deferred) | No | Cannot withdraw before 59½ without 10% penalty | Retirement savings with long time horizon |
| Roth IRA | No (tax-free) | No | Cannot withdraw earnings before 59½ without penalty | Retirement savings if you expect higher tax bracket later |
What to report on your tax return
Interest income is reported on Form 1040, Schedule B if you earned more than $1,500 in interest during the year. Your bank or credit union sends you a Form 1099-INT by January 31 showing how much interest you earned. You must report all interest income even if you don't receive a 1099-INT, though in practice the IRS receives a copy of the form and will notice if you don't report it.
If you earned interest in multiple accounts, add them all together. If the total is $1,500 or less, you can report the interest directly on line 1 of Form 1040 without filing Schedule B. Keep copies of all 1099-INT forms with your tax records in case the IRS asks questions. If you earned interest in a joint account with a spouse, the 1099-INT typically goes to the first-named owner, but you should split the interest 50/50 on your joint return unless you have a different ownership arrangement documented.
Frequently Asked Questions
Can I avoid taxes on savings interest by not reporting it?
No. Banks report interest to the IRS on Form 1099-INT, and the IRS matches that against your tax return. Failing to report interest income can result in penalties, interest charges, and an audit. The tax owed on interest is usually small enough that paying it is simpler than the consequences of not reporting it.
What's the difference between a high-yield savings account and a regular savings account for taxes?
There is no tax difference — both are taxed the same way at ordinary income rates. The only advantage of a high-yield account is that you earn more interest, which gives you more money to work with when planning taxes. A regular savings account earning 0.01% interest generates so little that tax planning is pointless.
If I put money in my child's savings account, do I pay tax on the interest or does my child?
Your child pays tax on the interest, but only up to a limit. For 2024, a child can earn roughly $1,300 in interest tax-free. Above that, the "kiddie tax" rule applies, and interest is taxed at the parent's rate. This only works if the child genuinely owns the money and you don't control how it's spent.
Do I have to report interest if I earned less than $10?
You don't have to file a form for interest under $10, but you still owe tax on it. In practice, almost no one earns exactly $5 in interest and stops there. If you earned any interest at all, report it on your tax return.
Can I deduct losses from savings accounts against interest income?
No. Savings accounts don't generate losses — they either earn interest or they don't. If you're thinking about investment losses (from stocks or bonds), those can offset investment gains, but savings account interest is not an investment for tax purposes.