Bank interest counts as income the IRS taxes every year
Yes, the interest your bank account earns is taxable income. The IRS treats it the same way it treats wages or other money you receive — you have to report it on your tax return and pay federal income tax on it. Most states also tax bank interest as part of your regular income, though a few states do not.
Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. This form lists all the interest paid to you and goes to both you and the IRS. You report this amount on your tax return, usually on Schedule 1 (Form 1040) or directly on your 1040 depending on your filing method.
The tax you owe depends on your overall income and tax bracket. If you earned $500 in interest and you are in the 22% federal tax bracket, you would owe roughly $110 in federal tax on that interest alone — though the exact amount depends on your total income and deductions.
Key Takeaways
- Bank interest is taxable income at both the federal and state level in most places, and you must report it on your annual tax return.
- Your bank sends you Form 1099-INT if you earned $10 or more in interest during the year, and the IRS receives a copy automatically.
- The tax rate on interest depends on your tax bracket, which is determined by your total income for the year.
- You can reduce taxable interest by holding money in tax-advantaged accounts like IRAs or 529 plans, which shelter interest from annual taxation.
- If you did not receive a 1099-INT but earned interest, you still must report it; the form is a record, not permission to skip reporting.
When the IRS requires your bank to report interest
Your bank is required to issue a Form 1099-INT and send it to the IRS if you earned $10 or more in interest during the calendar year. This threshold applies to most savings accounts, money market accounts, and certificates of deposit (CDs). The form arrives by January 31 of the following year.
If you earned less than $10, your bank does not have to send a 1099-INT, but you still owe tax on that interest. Many people with small savings balances or low-yield accounts fall into this category. The absence of a form does not mean the income is not taxable — it just means the bank did not report it to the IRS on your behalf.
Some accounts do not generate 1099-INT forms at all. Interest held in a traditional IRA or Roth IRA is not reported on a 1099-INT because it grows tax-deferred (or tax-free in a Roth). Similarly, interest in a 529 education savings plan is not reported annually if the money stays in the account.
How your tax bracket determines what you actually pay
The federal tax rate on interest is not a flat percentage — it depends on your total income for the year and your filing status. If you are single and earn $11,000 in wages plus $500 in interest, that $500 is taxed at your marginal rate, which is the rate applied to your last dollar of income.
For 2024, if you are single with $11,500 in total income, you fall into the 10% federal tax bracket, so you would owe roughly $50 in federal tax on the $500 interest. If your total income is $50,000, you are in the 12% bracket, and the same $500 interest would cost you about $60 in federal tax. The higher your income, the higher the rate applied to your interest.
State income tax works the same way. Most states tax interest as ordinary income at your state tax rate. A few states — including Florida, Texas, and Wyoming — do not have state income tax at all, so residents pay only federal tax on interest. New Hampshire and Tennessee tax only interest and dividend income, not wages.
What to do if you did not receive a 1099-INT
If you earned interest but did not receive a Form 1099-INT, you still have to report it on your tax return. This happens most often when interest falls below the $10 reporting threshold, or when you closed an account partway through the year and the bank did not issue a form.
Check your year-end account statements to find the total interest earned. Add it to Schedule 1 (Form 1040) or your tax software's interest income section, even if you have no 1099-INT to reference. The IRS may not catch the omission immediately, but it will eventually match your bank records to your return, and you will owe back taxes plus penalties and interest if the discrepancy is found.
If you think a 1099-INT is wrong — for example, the amount listed is higher than what you actually earned — contact your bank first. They can issue a corrected form (1099-INT with a "CORRECTED" box checked) if there was an error. You then file an amended return with the corrected figure.
Tax-advantaged accounts that shelter interest from annual taxation
Several account types let interest grow without triggering annual tax bills. A traditional IRA or 401(k) allows interest to compound tax-deferred, meaning you pay tax only when you withdraw the money in retirement. A Roth IRA goes further — interest grows tax-free and you owe no tax on withdrawals in retirement, provided you follow the rules.
A 529 education savings plan also shelters interest from annual taxation as long as the money is used for may have access to education expenses. If you withdraw it for non-education purposes, you pay tax on the earnings portion plus a 10% penalty, but the interest does not show up on your tax return year by year.
High-yield savings accounts (HYSA) and money market accounts held outside these tax-advantaged structures still generate taxable interest, even though the yields are higher than traditional savings accounts. The higher rate is attractive, but the interest is still fully taxable at your ordinary income rate.
Reporting interest on your tax return
If you file Form 1040 with tax software, the software typically asks you to enter interest income and automatically places it on Schedule 1. If you file by paper, you report interest on Schedule 1, line 8, and then transfer the total to your Form 1040.
If you have multiple accounts at different banks, add up all the interest from all the 1099-INT forms and any unreported interest below $10. Report the total as a single line item. You do not need to list each account separately unless you are itemizing deductions or have other complex income.
If you are married filing jointly, both spouses' interest income goes on the same return. If you file separately, each spouse reports only their own interest income. If you have a dependent child with a savings account, their interest is reported on their own tax return (or on your return if they are claimed as a dependent and have no other income).
What happens if you do not report interest income
The IRS receives a copy of every 1099-INT issued. If you do not report the interest on your tax return, the IRS will eventually notice the mismatch between what your bank reported and what you filed. This typically triggers a notice asking you to explain the discrepancy.
If you owe tax on unreported interest, you will be asked to pay the back taxes plus interest (calculated daily from the original due date) and a penalty. The penalty for failing to report income is usually 20% of the underpaid tax, though it can be higher if the IRS determines the omission was intentional.
Reporting interest, even if it is a small amount, is simpler and cheaper than dealing with an IRS notice later. If you made a mistake on a prior year return, you can file an amended return (Form 1040-X) to correct it before the IRS contacts you, which often results in a lower penalty.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. The $10 threshold is only for when your bank must send you a 1099-INT form. You still owe tax on any interest you earned, even if it is $1. Check your account statements and report the total on your tax return.
Is interest from a savings account taxed differently than interest from a CD?
No. Both are taxed as ordinary income at your marginal tax rate. The only difference is that CDs often pay higher interest rates, so you may owe more tax. The type of account does not change the tax treatment — only tax-advantaged accounts like IRAs and 529 plans get special treatment.
What if my bank issued a 1099-INT but I closed the account before the end of the year?
You still report the interest shown on the 1099-INT. The form reflects all interest earned during the calendar year, regardless of when you closed the account. If the amount seems wrong, contact your bank to verify it before filing your return.
Can I deduct the tax I paid on interest income?
No. Interest income is added to your taxable income, and the tax you owe is calculated based on your total income and bracket. You cannot deduct the tax itself. However, if you paid interest on a loan (such as student loan interest or mortgage interest), that may be deductible under certain conditions.
Do I report interest differently if I have accounts at multiple banks?
No. Add up all interest from all 1099-INT forms and any unreported interest below $10, then report the total as one line item on your tax return. You do not list each bank or account separately unless you have a specific reason to do so.