You cannot avoid paying taxes on savings account interest, but you can reduce what you owe

The IRS taxes all interest your savings account earns as ordinary income. There is no legal way to make that interest tax-free once it is credited to your account. However, you can lower your tax bill by keeping your savings in accounts or investments that produce less taxable interest, by earning interest in tax-advantaged accounts, or by offsetting interest income with deductions you already may have access to for.

The most practical approach depends on how much interest you earn and what your overall income looks like. If your savings account interest is under $10 per year, you will owe nothing because the standard deduction covers it. If you earn more, the strategies below can reduce what you report to the IRS.

Key Takeaways

  • All savings account interest is taxable income to the IRS, and you must report it on your tax return if you earn more than the annual reporting threshold.
  • Tax-advantaged accounts like Roth IRAs, 529 plans, and Health Savings Accounts let you earn interest without paying federal tax on it, though contribution limits apply.
  • Money market accounts, certificates of deposit, and I Bonds all produce taxable interest, but I Bonds can defer taxes for decades if you use them for education.
  • If your total income is below the standard deduction for your filing status, you owe no federal tax on savings interest even if you report it.
  • You report savings interest on Form 1040 using the amount from your bank's Form 1099-INT, which the bank sends to you and the IRS.

Tax-advantaged accounts that shield interest from federal tax

A Roth IRA lets you contribute up to $7,000 per year (or $8,000 if you are 50 or older) and earn interest tax-free forever. The catch is that you cannot withdraw the money before age 59½ without paying a penalty, except in narrow cases like first-time home purchase or disability. If you have earned income, a Roth IRA is the simplest way to earn tax-free interest.

A Health Savings Account (HSA) works similarly if you have a high-deductible health insurance plan. You can contribute up to $4,150 per year (or $8,300 for family coverage) and earn interest tax-free as long as you spend the money on medical expenses. Unlike a Roth IRA, you can withdraw HSA funds at any age for medical costs without penalty, and after age 65 you can withdraw for any reason (though non-medical withdrawals are taxed).

A 529 education savings plan lets you save for college or K-12 tuition and earn interest tax-free if you use the money for education. Contribution limits are high (often $235,000 or more per beneficiary), and you can change beneficiaries to a family member if plans change. Interest is taxed only if you withdraw money for non-education purposes.

A Coverdell Education Savings Account is smaller (up to $2,000 per year per child) but offers the same tax-free interest for education expenses. It has stricter income limits than a 529, so check whether you may have access to before opening one.

Lower-interest accounts that produce less taxable income

If you do not have access to tax-advantaged accounts or have already maxed them out, you can reduce taxable interest by choosing accounts that earn less. A regular savings account at a bank earns very little interest now—often 0.01% or less—so the tax bill is minimal. Money market accounts earn slightly more but still produce modest interest.

Certificates of deposit (CDs) lock your money away for a set term (three months to five years) in exchange for a may provide rate. The interest is fully taxable, but if rates are low, the tax hit is small. The tradeoff is that you cannot access your money without paying an early withdrawal penalty.

I Bonds (Series I Savings Bonds) are issued by the U.S. Treasury and earn interest that adjusts every six months based on inflation. The interest is exempt from state and local tax, and you can defer federal tax indefinitely if you hold the bond. If you redeem an I Bond to pay for education expenses, you may be able to exclude the interest from federal tax entirely under certain conditions. The downside is that you must hold an I Bond for at least one year, and you lose the last three months of interest if you redeem before five years.

Using the standard deduction to offset interest income

If your total income is below the standard deduction for your filing status, you owe no federal income tax even if you report interest. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. If your only income is $5,000 in savings interest, you report it but owe no tax because it falls below the threshold.

This matters most if you are retired or have very low income from other sources. A retiree with no wages, no Social Security, and only $10,000 in savings interest would report the interest but owe no federal tax. However, you still must file a return to claim this protection—the IRS does not know your situation unless you tell them.

State and local taxes are separate. Some states tax interest income even when federal tax is zero, so check your state's rules. A few states (like Illinois and Mississippi) exempt interest income entirely, while others tax it at the same rate as federal income.

Reporting savings interest to the IRS

Your bank sends you a Form 1099-INT by January 31 each year if you earned $10 or more in interest during the previous year. The form shows the total interest credited to your account. You report this amount on your Form 1040 (line 1b for interest income) when you file your tax return.

If you earned less than $10, your bank may not send a 1099-INT, but you still owe tax on the interest if your total income exceeds the standard deduction. You report it based on your own records—your bank statements or year-end summary.

The IRS receives a copy of every 1099-INT your bank sends, so they know how much interest you earned. If you do not report it on your return and your income is high enough to owe tax, the IRS will catch the discrepancy and send you a bill with penalties and interest.

What happens if you earn interest in multiple accounts

If you have savings at more than one bank, each bank sends its own 1099-INT. You add up all the interest from all the forms and report the total on line 1b of your Form 1040. The IRS also receives all the forms, so they know the total too.

This is why consolidating accounts can simplify your taxes—fewer forms to track and fewer places for errors. However, consolidation does not reduce your tax bill; it just makes reporting easier. The total interest is the same whether it sits in one account or ten.

If you move money between accounts during the year, only the interest earned counts as taxable income. The principal (the money you deposited) is not taxed when you move it or withdraw it.

Strategies that do not work

You cannot avoid taxes by not reporting interest, by closing the account, or by moving money to a different bank. The IRS receives a copy of the 1099-INT directly from your bank, regardless of whether you report it. Failing to report it triggers an audit notice and penalties.

You also cannot avoid taxes by keeping money in cash. Cash earns no interest, so there is no tax to avoid—but your money loses value to inflation. This is a poor trade-off unless you need the money immediately.

Offshore accounts do not shield U.S. citizens from federal tax on interest. The IRS taxes worldwide income for U.S. citizens and residents, and banks must report foreign accounts under FATCA (Foreign Account Tax Compliance Act). Hiding money offshore is tax evasion, which is a federal crime.

Frequently Asked Questions

Do I have to report savings interest if I earned less than $10?

Your bank does not send a 1099-INT for interest under $10, but you still owe tax on it if your total income exceeds the standard deduction. Report it based on your bank statements. If your total income is below the standard deduction, you owe no tax but may still want to file to claim refundable credits.

Can I put unlimited money in a Roth IRA to avoid taxes on interest?

No. Roth IRA contributions are limited to $7,000 per year ($8,000 if age 50+), and you must have earned income to contribute. If you have more savings than the limit allows, the excess must go in a taxable account. However, you can use multiple tax-advantaged accounts (Roth IRA, HSA, 529) to shelter more interest.

What if my savings interest pushes me over the standard deduction?

You will owe federal income tax on the amount above the standard deduction. The tax rate depends on your total income and filing status. Use the IRS tax tables or a tax calculator to estimate what you owe, then report the interest on your Form 1040.

Does state tax apply to savings interest even if federal tax does not?

It depends on your state. Some states (Illinois, Mississippi, others) do not tax interest income. Others tax it at the same rate as federal income. Check your state's tax website or ask a tax preparer in your state to find out whether you owe state tax on savings interest.

If I earn interest in a joint account, who reports it on their taxes?

The bank reports the full interest amount on a 1099-INT to whoever is listed as the primary account holder. That person reports the full amount on their tax return. If you and your spouse own the account jointly and want to split the interest for tax purposes, you must file Form 8949 and attach a statement explaining the split, then each report your share.