According to the IRS, you must pay taxes on all the interest you receive, from the first dollar. Banks will send you a 1099 if you earn more than 10 dollars each year, but if you earn less, they won’t send you the form. However, you still need to report all your earnings from savings.
Report Your Income
If you receive cash from your savings in the form of a payment or withdraw, you should keep track of it. You are responsible for paying ordinary income taxes on those withdraws that constitute interest.
Open a SEP IRA
You can save more pre-tax money in a SEP IRA than you can other types of IRAs. The max contribution is a lot higher. Plus, you only pay taxes after you take the money out and only on the interest, so if you invested after-tax money, only the interest is taxable.
Use Money toward Qualifying Expense
You can sometimes withdraw money, even money that constitutes interest from your savings, without paying taxes on it if you have a qualifying expense. Now, this changes with each tax year so you may want to check, but for example some educationals for yourself or individual family members may qualify.
Keep Withdraws Lower
If you can get by on less cash from your savings being withdrawn each year, withdraw less. Only take what you need, and you’ll only pay income taxes on the interest you take.
Save with Money Market Funds
An excellent way to control your taxes is to save in a money market fund with after-tax dollars that allow the interest to be untaxed until you withdraw the money later.
Open a Health Savings Account
If you have a lot of health care costs, one way to shield your money is to put pre-tax money into a health savings account that you then use for your health care payments.
Understand the Rules of Your State
Where you live has different rules than the federal government. Always look up your state tax rules too, both before investing and after investing, so that you know how to avoid paying more than you must.