You pay federal income tax on interest your checking account earns, but most checking accounts earn so little that the tax is minimal
The IRS taxes interest income the same way it taxes wages or investment returns. If your checking account pays interest—which most do not, or pay only a fraction of a percent—you owe federal income tax on that money. The bank will send you a Form 1099-INT in January showing how much interest you earned during the previous year, and you report that amount on your tax return.
State income tax works the same way. If your state has an income tax, you report the same interest on your state return. A few states do not tax interest income at all, but most do.
The practical reality: most people with checking accounts pay zero tax on checking account interest because the interest is so small. A checking account earning 0.01% annual interest on a $5,000 balance generates 50 cents per year. You still report it if you receive a Form 1099-INT, but the tax owed is negligible.
Key Takeaways
- Banks report checking account interest to the IRS on Form 1099-INT, which you receive in January if you earned $10 or more in interest during the year.
- You report that interest as income on your federal tax return, and it is taxed at your ordinary income tax rate.
- Most checking accounts earn so little interest that the tax burden is minimal or zero, but high-yield checking accounts can earn 4% to 5% and generate meaningful tax liability.
- State income tax applies to checking account interest in most states, with a few exceptions like Illinois and Texas.
- You can deduct certain expenses related to earning that interest, though for checking accounts this is rarely practical.
How the IRS knows about your checking account interest
Banks are required to report interest payments to the IRS and to you. If you earned $10 or more in interest during the calendar year, the bank sends you a Form 1099-INT by January 31. This form shows the total interest paid to your account during that year.
The bank also sends a copy to the IRS. The IRS matches the 1099-INT they receive from the bank against the income you report on your tax return. If you do not report the interest, the IRS will notice the discrepancy and may send you a notice or bill.
If you earned less than $10 in interest, the bank does not have to send you a Form 1099-INT, but you still owe tax on that interest if you file a return. You would need to track it yourself from your bank statements.
What tax rate applies to checking account interest
Checking account interest is taxed as ordinary income, which means it is taxed at your regular income tax bracket. If you are in the 22% federal tax bracket, interest income is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%.
This is different from long-term capital gains, which have lower tax rates. Interest is treated the same as wages or self-employment income.
Example: You earn $500 in checking account interest during the year and are in the 22% tax bracket. You owe $110 in federal income tax on that interest (22% of $500). Your state income tax, if applicable, would be additional.
High-yield checking accounts and tax liability
Most traditional checking accounts at big banks pay 0.01% or less in annual interest. But high-yield checking accounts, offered by online banks and some credit unions, can pay 4% to 5% or higher. These accounts generate real tax liability.
If you have $10,000 in a high-yield checking account earning 4.5%, you earn $450 in interest per year. At a 22% tax rate, that is $99 in federal tax. Add state tax and the total could exceed $120.
This is still a net gain—you keep most of the interest—but it is worth factoring into your decision about where to keep your money. Some people move money to high-yield savings accounts instead, which work the same way tax-wise but may offer slightly higher rates or different terms.
State income tax on checking account interest
Most states tax interest income the same way the federal government does. You report it on your state return, and it is taxed at your state income tax rate.
A few states do not tax interest income at all. These include Illinois, Iowa, Mississippi, and Texas. If you live in one of these states, you owe federal tax on checking account interest but not state tax.
Some states tax interest but exempt certain types of accounts or amounts. For example, some states exempt interest earned in retirement accounts. Check your state's tax agency website or ask a tax preparer if you are unsure whether your state taxes checking account interest.
Reporting checking account interest on your tax return
If you received a Form 1099-INT, you report the interest on Schedule 1 (Form 1040) under "Interest." If you use tax software, it will walk you through entering this information. If you file by hand, you write the amount in the appropriate box on Schedule 1.
If you earned interest but did not receive a Form 1099-INT (because it was under $10), you still report it. Add up the interest from your bank statements and report the total on Schedule 1.
If you have multiple checking accounts at different banks, each bank sends its own Form 1099-INT. You add them all together and report the total on your return.
Deducting expenses related to checking account interest
In theory, you can deduct certain expenses incurred to earn interest income. For example, if you paid a fee to open or maintain a checking account, that fee might be deductible as a miscellaneous expense. However, the IRS has strict rules about this, and for most people the deduction is not worth the effort.
As of 2024, miscellaneous itemized deductions are only deductible if they exceed 2% of your adjusted gross income. For someone earning $50,000 per year, that means you need more than $1,000 in miscellaneous expenses before you can deduct any of them. A $10 monthly checking account fee does not come close.
If you have substantial fees or expenses related to earning interest, talk to a tax preparer about whether they are deductible in your situation.
Frequently Asked Questions
Do I have to report checking account interest if I earned less than $10?
Yes. The bank does not have to send you a Form 1099-INT if you earned less than $10, but you still owe tax on that interest. You track it from your bank statements and report it on your return. The IRS expects you to report all income, regardless of whether you receive a form.
What if my bank did not send me a 1099-INT but I know I earned interest?
Contact the bank and ask them to send it. If the interest was under $10, the bank may not be required to send one, but they should be able to tell you the exact amount. Report that amount on your tax return even if you do not have the form.
Can I avoid taxes by moving money between checking accounts?
No. The IRS taxes interest based on when it is earned, not where the money is held. Moving money from one account to another does not change the tax owed. You still report all interest earned during the year.
Is checking account interest taxed differently if I am retired?
No. Interest is taxed the same way regardless of your age or employment status. However, if you are retired and your income is low, you may owe no federal tax at all because your total income is below the filing threshold. A tax preparer can tell you whether you need to file.
What if I earned interest in a joint checking account?
The bank reports the total interest to the IRS. If the account is in both names, you and the other account holder need to decide how to split the interest for tax purposes. Usually you split it 50-50, but you can split it differently if you have a written agreement. Each person reports their share on their own tax return.