You don't pay income tax on the money sitting in your checking account itself, but you do pay tax on the interest your bank pays you

The balance in your checking account is not taxable income. You earned that money before you deposited it, and you already paid taxes on it (or will when you file). The IRS does not tax you again for keeping money in a bank.

However, most checking accounts earn interest—sometimes a very small amount. That interest is taxable income in the year you earn it. Your bank reports this to the IRS on a Form 1099-INT, and you report it on your tax return. The amount varies widely depending on the bank and the account type.

If you have a checking account that earns no interest, you have nothing to report to the IRS about that account. If your account earns interest, you will receive a 1099-INT form from your bank by January 31 of the following year, and you must include that interest on your tax return.

Key Takeaways

  • Money you deposit into your checking account has already been taxed as income when you earned it, so the balance itself is not taxable again.
  • Interest paid by your bank on a checking account balance is taxable income and must be reported on your federal tax return.
  • Your bank sends you a Form 1099-INT by January 31 if you earned $10 or more in interest during the year (though some banks report smaller amounts).
  • Most traditional checking accounts earn little or no interest, so many people have no interest income to report.
  • High-yield checking accounts earn more interest and generate larger 1099-INT forms, making the tax reporting more noticeable.

How banks report interest income to the IRS

Your bank tracks the interest it pays you throughout the year. By January 31, if you earned $10 or more in interest (though some banks report even smaller amounts), the bank mails or emails you a Form 1099-INT. This form shows the total interest paid to your account during the previous calendar year.

The bank sends a copy of this form to the IRS as well. When you file your tax return, you report the interest shown on your 1099-INT. The IRS matches what you report against what the bank reported, so if you leave it off your return, the IRS will likely notice the discrepancy.

You can find your 1099-INT forms in your online banking portal, or you can contact your bank directly to request a copy. If you have multiple checking accounts at different banks, you may receive multiple 1099-INT forms.

Interest rates and how much tax you'll owe

Traditional checking accounts at most large banks earn zero interest or a fraction of one percent. At those rates, you might earn $1 to $5 per year on a $5,000 balance. That small amount is still taxable, but it will not significantly affect your tax bill.

High-yield checking accounts offered by online banks and some credit unions pay much higher rates—sometimes 4% to 5% annually. On a $10,000 balance, that could mean $400 to $500 in interest per year. That interest is taxed as ordinary income at your regular tax rate, so if you are in the 22% tax bracket, you would owe roughly $88 to $110 in federal income tax on that interest alone.

The interest rate your bank pays changes over time and depends on the Federal Reserve's interest rate decisions. When rates are high, you earn more interest and owe more tax. When rates are low, the opposite is true. Check your bank's website or your account statements to see what rate you are currently earning.

Reporting interest on your tax return

When you file your federal income tax return, you report interest income on Schedule B (if you have more than $1,500 in interest income) or directly on your Form 1040 (if you have less). The interest from your checking account goes in the same place as interest from savings accounts, money market accounts, or certificates of deposit.

If you have only one checking account with a small amount of interest, you may be able to report it directly on Form 1040 without using Schedule B. Your tax software will guide you through this process. If you use a tax professional, bring your 1099-INT forms with you.

State income tax works the same way. Most states tax interest income at the same rate they tax other income. A few states do not tax interest income at all, so check your state's rules if you live in one of those places.

What happens if you don't report the interest

The IRS receives a copy of every 1099-INT your bank sends you. If you do not report the interest on your tax return, the IRS will see that you received income that you did not claim. This can trigger a notice asking you to explain the discrepancy or pay the tax you owe plus penalties and interest.

The penalty for not reporting income is usually 20% of the unpaid tax, plus interest that accrues from the original due date. If the IRS determines the omission was intentional fraud rather than an honest mistake, the penalty can be as high as 75% of the unpaid tax.

Reporting the interest takes only a few minutes and costs nothing. It is far simpler to report it correctly when you file than to deal with the IRS later.

Checking accounts at credit unions and smaller banks

Credit unions often pay higher interest on checking accounts than large national banks do. Some credit unions offer rates competitive with high-yield online accounts. If your credit union pays interest, you will receive a 1099-INT just as you would from any other bank, and you report it the same way.

Smaller regional banks also vary widely in the interest they pay. Some offer no interest on checking accounts; others offer rates in the 1% to 3% range. Always ask your bank or credit union what rate you are earning and whether they will send you a 1099-INT at the end of the year.

Frequently Asked Questions

Do I have to report interest if it's less than $10?

Banks are required to send a 1099-INT only if interest is $10 or more, but some banks report smaller amounts anyway. Even if you do not receive a 1099-INT, you should still report any interest you earned. The IRS may have a record of it from the bank's internal reporting.

What if I earned interest but didn't get a 1099-INT?

Contact your bank and ask for a copy. If the bank cannot provide one, you can still report the interest based on your account statements. Write down the interest shown on your statements and report that amount on your tax return, even without the official form.

Can I deduct bank fees from the interest I report?

No. You report the gross interest your bank paid you, not the net amount after fees. Bank fees are not tax-deductible for most people, so you cannot reduce your taxable interest by subtracting them.

Does a joint checking account change how interest is taxed?

The interest is still taxable income. If the account is in both names, the bank may split the 1099-INT between you and the other account holder, or it may report all of it to one person. Check with your bank about how they handle this, and make sure the person who receives the 1099-INT reports it on their tax return.

What if I closed my checking account during the year?

You still owe tax on any interest earned before you closed it. Your bank will send you a 1099-INT for the interest earned during the time the account was open. Report it on your tax return for that year.