Maryland taxes interest earned on savings accounts at your state income tax rate

Maryland treats savings account interest as ordinary income and taxes it the same way it taxes wages or salary. If you earn interest on a savings account held at a bank or credit union in Maryland, you will report that interest on your Maryland state tax return. The amount you owe depends on your total income and which tax bracket you fall into — Maryland's rates range from 2% to 5.75% depending on your filing status and income level.

The interest is taxable whether the account is held in Maryland or out of state. If you live in Maryland and earn interest anywhere, you owe Maryland tax on it. The only exception is interest on certain bonds issued by the state of Maryland itself, which is exempt from Maryland state income tax (though still subject to federal tax).

Your bank will send you a Form 1099-INT in January if you earned $10 or more in interest during the previous year. This form shows the exact amount of interest you earned, and you use it to fill out your Maryland return. Even if you do not receive a 1099-INT because your interest was below $10, you still owe tax on any interest you earned.

Key Takeaways

  • Maryland taxes savings account interest at your state income tax rate, which ranges from 2% to 5.75% depending on your income.
  • You report interest income on your Maryland state tax return using the Form 1099-INT your bank sends you in January.
  • Interest earned on accounts held anywhere — in Maryland or out of state — is taxable if you are a Maryland resident.
  • Interest on bonds issued by the state of Maryland is exempt from Maryland state tax, though federal tax still applies.
  • If you earned $10 or more in interest, your bank will report it to you and to the Maryland Department of Revenue.

How Maryland's tax brackets work for interest income

Maryland has six tax brackets for single filers and six for married couples filing jointly. Your interest income is added to your other income, and the combined total determines your tax rate. For the 2024 tax year, single filers pay 2% on income up to $1,000, then the rate increases in steps until it reaches 5.75% on income over $300,000. Married couples filing jointly pay 2% on income up to $2,000 and reach 5.75% on income over $500,000.

This means a person in the lowest bracket pays 2% tax on their interest, while someone in the highest bracket pays 5.75%. If you have $1,000 in annual interest and file as single, you would owe roughly $20 in Maryland state tax on that interest (2% of $1,000). If you have the same $1,000 in interest but your total income puts you in the 5.75% bracket, you would owe roughly $57.50.

The brackets adjust each year for inflation, so the income thresholds change slightly. You can find the current year's brackets on the Maryland Department of Revenue website or on your tax forms.

When you receive a 1099-INT and what to do with it

Banks and credit unions send Form 1099-INT to customers who earned $10 or more in interest during the calendar year. You will receive it by January 31 of the following year. The form shows the total interest paid to you in box 1, and any federal tax withheld (if any) in box 4. Most savings accounts do not have federal tax withheld, so box 4 is usually blank.

You use the amount in box 1 to fill out your Maryland tax return. If you file electronically, you enter the interest amount on the appropriate line of your return. If you file by paper, you attach the 1099-INT or a copy to your return. You must report the interest even if you do not receive a 1099-INT — for example, if you earned $8 in interest, your bank may not send a form, but you still owe tax on that $8.

Keep your 1099-INT with your tax records for at least three years. The Maryland Department of Revenue receives a copy of every 1099-INT issued, so if you do not report the interest on your return, the department will likely catch the discrepancy during processing or in a later audit.

Interest from out-of-state accounts and federal tax considerations

If you hold a savings account at a bank in another state or at an online bank, Maryland still taxes the interest you earn. Your residency for tax purposes is what matters, not where the account is located. An online savings account earning 4% interest is taxed the same way as a local bank account earning 0.5% interest.

Federal income tax also applies to savings account interest. You will owe both Maryland state tax and federal tax on the same interest income. The federal tax rate depends on your federal tax bracket, which ranges from 10% to 37%. Some people mistakenly think that because they owe state tax, they do not owe federal tax, or vice versa — that is not correct. The two taxes are separate and both apply.

If you are retired and receiving Social Security, interest income can affect how much of your benefits are taxable. Interest is counted as "combined income" for Social Security tax purposes, so high interest earnings can push you into a bracket where some of your benefits become taxable. This is a federal rule, not a Maryland rule, but it is worth understanding if you rely on Social Security.

Maryland tax-exempt bonds and other interest that does not get taxed

Interest on bonds issued by the state of Maryland is exempt from Maryland state income tax. This includes Maryland state general obligation bonds and revenue bonds. However, interest on U.S. Treasury bonds is not exempt from Maryland tax — it is only exempt from federal tax. Interest on bonds issued by other states is also taxable in Maryland.

Municipal bonds issued by cities or counties in Maryland may or may not be exempt from Maryland tax, depending on the type of bond. Most are exempt, but you should check the bond documentation or ask your broker. Interest on municipal bonds issued by other states is taxable in Maryland.

Interest on savings accounts, money market accounts, and certificates of deposit (CDs) is always taxable in Maryland, regardless of the institution or the account type. There is no exemption for any of these products.

Reporting interest on your Maryland tax return

You report interest income on Form 502, Maryland's individual income tax return. The interest goes on the line labeled "Interest Income" in the income section. If you have multiple 1099-INTs from different banks, you add up all the interest and enter the total on that one line. You do not need to list each account separately unless the total interest exceeds a certain threshold (which varies by year and filing status).

If you file using tax software, the software will ask you to enter your interest income, and it will automatically place it in the correct location on your return. If you file by paper, you write the total interest amount on the appropriate line and attach your 1099-INTs or a summary of them.

Interest income is added to your other income to calculate your total taxable income. This total income is then used to determine which tax bracket you fall into and how much Maryland tax you owe. If you have other deductions or credits, they reduce your taxable income, which in turn reduces the tax owed on your interest.

What happens if you do not report interest income

The Maryland Department of Revenue receives copies of all 1099-INTs issued to Maryland residents. If you do not report interest on your return, the department's computer system will flag the discrepancy. You may receive a notice asking you to file an amended return or explaining that additional tax is owed.

If the interest was small and you simply forgot to report it, you can file an amended return (Form 502X) to correct the error. You will owe the tax plus interest on the unpaid amount. The interest rate on unpaid taxes is set by Maryland and changes quarterly — for 2024, it is 8% per year.

Intentionally failing to report interest income can result in penalties in addition to the tax and interest owed. Maryland imposes a penalty of 10% of the underpaid tax if the failure to report was negligent, and up to 75% if it was fraudulent. These penalties are rare for simple oversights, but they do apply in cases of deliberate evasion.

Frequently Asked Questions

Do I owe Maryland tax on interest if I moved out of state during the year?

You owe Maryland tax on interest earned while you were a Maryland resident. If you moved out of state on June 30, you report only the interest earned from January 1 through June 30. You will file a part-year resident return for Maryland and a resident return for your new state. Both states will tax the income earned while you lived there.

What if my savings account earned less than $10 in interest?

You still owe tax on it, even though your bank did not send a 1099-INT. You must report all interest income on your return, no matter how small. Keep your bank statements to document the amount if you need to prove it later.

Can I deduct savings account interest as a business expense?

No. Interest earned on a personal savings account is not deductible. If you have a business savings account and earn interest on business funds, that interest is still taxable income to you, though it may be reported differently depending on your business structure.

Is interest on a high-yield savings account taxed differently than interest on a regular savings account?

No. Maryland taxes all savings account interest the same way, regardless of the rate or account type. A high-yield savings account earning 4% is taxed identically to a regular savings account earning 0.5%. The higher rate just means you owe more tax.

Do I need to pay estimated tax if I have a lot of interest income?

If your interest income is large enough that you expect to owe more than $100 in Maryland tax for the year, you may need to make quarterly estimated tax payments. Contact the Maryland Department of Revenue or speak with a tax professional to determine if estimated payments apply to your situation.