Bank interest counts as income on your tax return

Yes, the interest your bank pays you is taxable income. The IRS treats it the same way it treats wages or other money you receive — you must report it on your federal tax return. Most banks send you a Form 1099-INT in January showing how much interest you earned in the previous year, and you report that amount on your tax return.

The tax you owe depends on your total income and tax bracket. If you earned $100 in interest and you are in the 22% tax bracket, you will owe roughly $22 in federal tax on that interest alone. State income tax may apply too, depending on where you live.

The only exception is interest earned in certain retirement accounts like traditional IRAs or 401(k)s, where the interest grows tax-deferred until you withdraw the money. Regular savings accounts, money market accounts, and certificates of deposit (CDs) all generate taxable interest.

Key Takeaways

  • Banks report interest to the IRS on Form 1099-INT, which you receive by January 31 if you earned $10 or more in interest during the year.
  • You must report all bank interest on your federal tax return, even if the bank does not send you a 1099-INT form.
  • The tax you owe on interest depends on your tax bracket and total income for the year.
  • Interest earned in tax-deferred retirement accounts does not trigger immediate tax, but interest in regular savings accounts does.
  • If you earned interest in multiple accounts, you add all of it together when you report it to the IRS.

When the bank sends you Form 1099-INT

Your bank will mail or email you a Form 1099-INT by January 31 if you earned $10 or more in interest during the previous calendar year. This form shows the total interest paid to you across all accounts you held at that bank. If you have accounts at multiple banks, you will receive a separate 1099-INT from each one.

The form lists the interest in Box 1. You use this number when you fill out your tax return. If you earned interest at three different banks, you will get three 1099-INT forms, and you add all three amounts together on your return.

The bank also sends a copy to the IRS, so the IRS already knows how much interest you earned. This is why you must report it — the IRS will notice if your return does not match what the bank reported.

How to report interest on your tax return

On the federal Form 1040, interest income goes on Schedule 1, Line 8b (or the equivalent line if you are using tax software). You enter the total of all interest you earned from all sources — banks, CDs, money market accounts, and any other interest-bearing accounts.

If you use tax software like TurboTax, H&R Block, or TaxAct, you enter the 1099-INT information when prompted, and the software automatically places it in the correct spot. If you file by hand, you write the total on the line and attach a copy of your 1099-INT forms to your return.

State tax returns vary by state. Some states tax interest income the same way the federal government does; others exempt it or tax it at a different rate. Check your state's tax authority website to learn the rules for your state.

Interest income under $10 and unreported interest

If you earned less than $10 in interest during the year, your bank will not send you a 1099-INT form. However, you are still required to report that interest on your tax return. The IRS does not care whether the bank reported it — you owe tax on all interest you receive.

If you earned interest at a bank that failed to send a 1099-INT when it should have, you still report the interest. You can contact the bank and ask for a corrected form, or you can report the amount you know you earned based on your account statements. Keep your bank statements as proof in case the IRS asks questions later.

Interest in retirement accounts and savings bonds

Interest earned inside a traditional IRA or 401(k) is not taxed in the year it is earned. The money grows tax-deferred, and you pay tax only when you withdraw it in retirement. This is one of the main advantages of these accounts.

Interest in a Roth IRA is also tax-deferred, and withdrawals in retirement are tax-free if you follow the rules. Interest in a Roth 401(k) works the same way.

Interest on Series I Savings Bonds and Series EE Savings Bonds is also tax-deferred until you cash the bond or it reaches final maturity. You can choose to report the interest each year or wait until you redeem the bond. If you use the bonds to pay for education, you may be able to exclude the interest from tax entirely.

What happens if you do not report interest income

The IRS matches 1099-INT forms to tax returns automatically. If your return does not include the interest the bank reported, the IRS will send you a notice asking for the missing income and the tax owed. You will also owe interest on the unpaid tax, calculated from the original due date of your return.

If the IRS determines you intentionally hid interest income, you may face penalties on top of the tax and interest. The penalty for negligence is 20% of the underpaid tax. If the IRS suspects fraud, the penalty can be as high as 75%.

The simplest approach is to report all interest when you file. If you earned interest and did not receive a 1099-INT, add it to your return anyway based on your account statements.

Strategies to reduce taxable interest income

You cannot avoid tax on interest by moving money around or using different banks — all interest is taxable regardless of where you earn it. However, you can reduce the amount of interest you earn in the first place by keeping less money in low-yield savings accounts.

High-yield savings accounts pay more interest than traditional savings accounts, which means you will owe more tax on the interest. But the after-tax return is usually still higher than a traditional account, so the higher tax does not make it a bad choice.

Keeping money in tax-deferred retirement accounts like IRAs and 401(k)s means the interest is not taxed until you withdraw it, which can be decades away. This is often the best strategy for long-term savings.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether the bank sends you a 1099-INT form. You must report all interest income on your tax return, no matter how small. Use your bank statements as proof of the amount.

What if I earned interest at a bank that closed or went out of business?

You still owe tax on the interest. If the bank no longer exists, use your final account statement or any 1099-INT the bank sent before it closed. If you cannot locate documentation, contact the FDIC or your state's banking regulator — they may have records of the interest paid.

Can I deduct bank fees from the interest I report?

No. You report the full interest amount the bank paid you. Bank fees are not deductible against interest income on your federal return, though some states allow it. Report the interest as the bank shows it on the 1099-INT.

Is interest on a joint account taxable to both people?

No. Only the person whose Social Security number is on the account receives the 1099-INT and reports the interest. If the account is truly joint and both people contributed equally, you may need to split the interest for tax purposes — check with a tax professional about your specific situation.

What if the 1099-INT shows the wrong amount?

Contact the bank immediately and ask for a corrected form (called an amended 1099-INT). The bank will send a corrected form to you and the IRS. Report the corrected amount on your tax return. If you file before receiving the correction, you can file an amended return once you get the correct form.