New Jersey does not tax interest income from savings accounts
New Jersey has no state income tax on interest earned in savings accounts, money market accounts, or certificates of deposit. This applies whether the account is held at a bank, credit union, or online lender. The interest you earn stays yours to keep without a state tax bill.
However, the federal government does tax that interest as ordinary income. When your bank pays you interest, it reports the amount to the IRS on a Form 1099-INT if the interest exceeds $10 in a calendar year. You must report this interest on your federal tax return, even though New Jersey does not tax it.
The key distinction: New Jersey residents pay no state tax on savings interest, but federal tax still applies. This makes New Jersey one of the more favorable states for savers, since some states do tax interest income at their state rate.
Key Takeaways
- New Jersey imposes no state income tax on interest earned from savings accounts, money market accounts, or CDs.
- The federal government taxes savings interest as ordinary income, and you must report it on your federal tax return if it exceeds $10 per year.
- Your bank will send you a Form 1099-INT showing the interest paid if the amount is $10 or more.
- Interest income counts toward your federal taxable income and may affect your tax bracket or other tax benefits you claim.
How federal tax on savings interest works
The IRS treats interest from savings accounts as taxable income in the year you receive it. This means if your savings account earned $150 in interest during 2024, that $150 is added to your other income when you file your 2024 federal tax return. The tax you owe on that interest depends on your overall income and tax bracket.
Your bank is required to report interest payments to the IRS using Form 1099-INT. You receive a copy of this form by January 31 of the following year. If you earned less than $10 in interest, your bank may not send a 1099-INT, but you still owe tax on the interest if you have other income that requires you to file a return.
Interest income is treated the same as wages or salary for federal tax purposes — it is ordinary income, not capital gains. This means it is taxed at your regular income tax rate, which can range from 10% to 37% depending on your total income and filing status.
When interest income affects your federal tax return
If you file a federal tax return, you must report all interest income, even small amounts. On Form 1040, interest goes on Line 1b under "Interest." If you have multiple savings accounts or other sources of interest, add them all together and report the total.
Interest income can push you into a higher tax bracket if your total income crosses a threshold. For example, if you earn $45,000 in wages and $2,000 in savings interest, your taxable income is $47,000, which may move you from one tax bracket to another. This is why tracking your interest earnings matters, even in a state like New Jersey that does not tax it.
Interest income also counts toward your modified adjusted gross income (MAGI), which determines whether you can claim certain tax credits or deductions. If you are close to an income limit for a benefit like the Earned Income Tax Credit or education credits, extra interest income could reduce or eliminate that benefit.
Reporting interest from multiple accounts
If you have savings accounts at more than one bank, each bank reports interest separately on its own Form 1099-INT. You receive a copy of each form, and you must add all the interest amounts together when you report on your federal return. The IRS also receives copies of all these forms, so they know your total interest income.
Online banks, credit unions, and traditional banks all report interest the same way. There is no difference in how the interest is taxed based on where you hold the account. A high-yield savings account at an online bank reports interest just like a regular savings account at a local bank.
Keep your own records of interest earned throughout the year, especially if you move money between accounts or open new accounts. Your bank statements show the interest paid each month, so you can verify the total on the 1099-INT when it arrives.
Interest income and New Jersey state taxes
New Jersey residents do not file a state income tax return and do not pay state income tax on any type of income, including interest. This is unusual — most states tax interest income at their state rate. New Jersey's lack of a state income tax means you save money on interest earnings compared to residents of states like New York, Pennsylvania, or Connecticut.
This tax advantage applies only to New Jersey residents. If you move out of New Jersey, you may become subject to your new state's tax on interest income. Conversely, if you move to New Jersey, you stop owing state tax on interest once you establish residency.
The absence of state tax on interest does not change your federal tax obligation. You still report the interest on your federal return and pay federal tax on it.
What happens if you do not report interest income
The IRS receives copies of all 1099-INT forms sent to you. If you do not report the interest on your federal return, the IRS will notice the discrepancy between what you reported and what your banks reported. This can trigger an audit or a notice asking you to explain the difference.
Failing to report interest income is considered tax evasion, and penalties can include back taxes, interest charges on the unpaid tax, and accuracy-related penalties of 20% or more of the underpaid tax. It is far simpler and cheaper to report the interest when you file.
If you owe little or no federal tax because your income is below the filing threshold, you may still need to file a return to report the interest. Check the IRS filing requirements for your age and income level.
Strategies for managing interest income taxes
If you have a large amount of savings earning interest, you can reduce your tax burden by holding some money in accounts that do not generate taxable interest. Treasury bills, I Bonds, and certain municipal bonds have different tax treatment than savings account interest.
You can also consider the timing of large deposits or withdrawals. Interest accrues daily in most savings accounts, so moving money in or out affects how much interest you earn in a given year. This is not a major tax strategy for most people, but it can matter if you are managing a large balance.
For retirement savings, accounts like traditional IRAs and 401(k)s allow interest to grow without triggering annual federal tax. The tax is deferred until you withdraw the money in retirement. This is one reason these accounts are valuable for long-term saving.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Your bank does not send a 1099-INT for interest under $10, but you still owe federal tax on it if you are required to file a return. Check the IRS filing requirements based on your age and income. If you file, report all interest earned, no matter the amount.
Does New Jersey tax interest from CDs or money market accounts?
No. New Jersey does not tax interest from any type of savings vehicle, including CDs, money market accounts, or savings bonds. However, federal tax still applies to all of these.
What if I earned interest in a joint account with someone else?
Each person who owns the account receives a 1099-INT showing their share of the interest. The bank divides the interest based on ownership percentage. Each owner reports their portion on their own federal tax return.
Can I deduct savings account interest as a business expense?
No. Interest earned on personal savings accounts is taxable income, not a deductible expense. Interest is only deductible if you paid it (for example, mortgage interest or business loan interest), not if you earned it.
Does moving to New Jersey change how my past interest income is taxed?
No. Interest you earned before moving to New Jersey is taxed by your previous state based on the rules that applied when you earned it. Moving to New Jersey only affects interest you earn after you establish residency there.