Yes, interest from your bank account is taxable income

The IRS treats interest earned in savings accounts, money market accounts, and certificates of deposit (CDs) as ordinary income. You report it on your federal tax return the same way you report wages or other income. The bank sends you a Form 1099-INT each January showing how much interest you earned the previous year, and you include that amount on your tax return.

The tax rate you pay on interest depends on your overall income and tax bracket — it is not a flat rate. Interest is added to your other income for the year, and you pay tax at whatever marginal rate applies to that total. If you earned $500 in interest and you are in the 22% tax bracket, you owe roughly $110 in federal tax on that interest (though state taxes may apply too).

This applies even if the interest is small. There is no minimum threshold — if you earned $5 in interest, it is technically taxable. However, the IRS does not require you to report interest under $10 on your tax return if you received only one Form 1099-INT. If you received multiple 1099-INT forms, you must report all of them.

Key Takeaways

  • Bank interest is taxed as ordinary income at your regular tax rate, not at a special rate.
  • Your bank reports interest to the IRS on Form 1099-INT, which you receive by January 31 each year.
  • You must report the interest on your federal tax return, and most states also tax bank interest as income.
  • Interest under $10 does not have to be reported if you received only one 1099-INT, but interest from multiple accounts must all be reported.

When the bank sends you Form 1099-INT

Banks mail Form 1099-INT by January 31 of the year following the one in which you earned the interest. If you earned interest in 2024, you will receive the form by January 31, 2025. The form shows the total interest paid to you during that calendar year.

You will receive a 1099-INT for each account at each bank where you earned interest above the reporting threshold. Most banks report all interest, even amounts under $10, but some report only interest of $10 or more. If you have multiple accounts, you may receive multiple forms, and you must add all of them together when you file your taxes.

The IRS receives a copy of every 1099-INT your bank sends you. This means the IRS already knows how much interest you earned. If you do not report it on your tax return, the IRS will likely catch the discrepancy during processing.

How interest affects your tax bracket and deductions

Interest income pushes your total income higher, which can move you into a higher tax bracket. If you earned $60,000 in wages and $2,000 in interest, the IRS treats your income as $62,000. Depending on your filing status, this higher total might push you into the next tax bracket, meaning you pay a higher rate on some or all of your income.

Higher income can also reduce certain deductions and credits you might otherwise claim. For example, if you are close to the income limit for the Earned Income Tax Credit (EITC), interest income could push you over that limit and reduce or eliminate the credit. Similarly, interest income can affect whether you can deduct student loan interest or contribute to a Roth IRA.

This is why some people with modest incomes try to minimize interest by keeping money in checking accounts (which typically earn little or no interest) rather than high-yield savings accounts. However, the tax on interest is usually much smaller than the interest itself, so moving money to earn higher interest is usually still worthwhile.

State and local taxes on bank interest

Most states tax bank interest as income, using the same 1099-INT form your bank sends to the IRS. You report the interest on your state tax return along with your federal return. A few states do not tax interest income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. New Hampshire and Tennessee tax only interest and dividend income, not wages.

Some cities and counties also impose local income taxes that include interest. If you live in a place with local income tax — such as New York City, Columbus, Ohio, or Louisville, Kentucky — you will owe local tax on your interest as well as state and federal tax. Your state tax form will tell you whether you need to file a local return.

Reporting interest on your tax return

You report interest income on Schedule B (Interest and Ordinary Dividends) if your total interest and dividends exceed $1,500, or if you received a Form 1099-INT. If your interest is under $1,500 and you did not receive a 1099-INT, you can report it directly on Form 1040 (the main federal tax form) without using Schedule B.

When you file electronically using tax software, the software walks you through entering the information from your 1099-INT forms. If you file by paper, you attach Schedule B to your Form 1040 and list each 1099-INT separately. The total goes on line 1b of Form 1040.

If you file jointly with a spouse, each person's interest is reported separately on Schedule B, but the total is combined on Form 1040. If your spouse earned interest in their own account, you both report it, and the IRS receives 1099-INT forms for both of you.

What happens if you do not report interest income

If you do not report interest on your tax return and the IRS discovers it, you will owe back taxes plus interest on the unpaid amount. The IRS charges interest at a rate set quarterly — currently around 8% per year, though it varies. You may also owe a penalty of 20% of the unpaid tax if the IRS determines the underreporting was substantial.

The IRS matches 1099-INT forms to tax returns automatically. If your return shows no interest income but the IRS received a 1099-INT in your name, the IRS will send you a notice asking you to explain the discrepancy. You can then file an amended return, but you will still owe the back taxes and interest.

If the error was unintentional and you file an amended return promptly after discovering it, the IRS may waive the penalty, though you will still owe the back taxes and interest. The best approach is to report all interest when you file, even if the amount is small.

Strategies for managing interest income taxes

You cannot avoid paying tax on interest, but you can be strategic about where you keep money. Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw it, so these accounts shield interest from immediate taxation. If you have money you will not need for several years, moving it into a retirement account can defer the tax.

For money you need to access, a high-yield savings account still usually produces more after-tax income than a regular savings account, even after accounting for the tax on the interest. If you earned $500 in interest and owe $110 in federal tax (at 22%), you keep $390 — which is still more than you would earn in a regular account earning little or no interest.

Some people use tax-loss harvesting in investment accounts to offset interest income, but this requires owning investments and realizing losses, which is a more complex strategy. For most people with modest savings, the simplest approach is to report the interest and move on.

Frequently Asked Questions

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

If you received only one 1099-INT showing interest under $10, you do not have to report it. However, if you received multiple 1099-INT forms from different banks or accounts, you must report all of them, even if each one is under $10. The safest approach is to report all interest, regardless of amount.

What if my bank did not send me a 1099-INT?

If you earned interest but did not receive a 1099-INT, you should still report it on your tax return. Contact your bank to ask why the form was not sent — it may have been mailed to an old address, or the bank may not have reported it. You can report the interest based on your own records, such as statements showing the interest deposited.

Is interest from a joint account taxed differently?

Interest from a joint account is taxed to whoever owns the account. If both people own the account equally, the interest is typically split 50-50 for tax purposes, and each person reports their share. The bank may issue one 1099-INT or two, depending on how the account is registered — check with your bank about how they report joint account interest.

Can I deduct the taxes I pay on interest?

No, you cannot deduct taxes paid on interest income. You report the interest as income and pay tax on it; the tax itself is not deductible. However, if you paid investment fees to earn that interest, those fees may be deductible under certain circumstances, though this is rare for bank accounts.

Does interest from a money market account get taxed differently than savings account interest?

No, interest from money market accounts, savings accounts, and CDs are all taxed the same way as ordinary income. The type of account does not matter — only the amount of interest earned. All interest is reported on Form 1099-INT and taxed at your regular rate.