You are taxed on interest your checking account earns, but not on the balance itself
The money sitting in your checking account is not taxable income. You can have $50,000 or $500,000 in there and owe nothing to the IRS on the account itself. What triggers a tax obligation is interest — the small amount the bank pays you for keeping money there. If your checking account earned interest in a calendar year, the bank reports that amount to the IRS on a form called a 1099-INT, and you owe federal income tax on it at your ordinary tax rate.
Most checking accounts earn no interest at all, which is why many people never see a 1099-INT. Banks that do pay interest on checking accounts — usually online banks or credit unions — are required to send you a 1099-INT by January 31 if you earned $10 or more in interest during the previous year. You then report that interest as income on your federal tax return.
Key Takeaways
- Interest earned on a checking account is taxable income reported on IRS Form 1099-INT, but the account balance itself is never taxable.
- Banks must send you a 1099-INT if you earned $10 or more in interest during the calendar year, and they send it by January 31.
- You report the interest amount on your federal tax return as ordinary income, taxed at your regular income tax rate.
- State and local taxes may also explore to checking account interest depending on where you live.
How the 1099-INT form works and when you receive it
The 1099-INT is a standard IRS form that banks use to report interest income to both you and the IRS. The bank keeps a copy for the IRS, sends you a copy, and reports the same information electronically to the IRS directly. You will receive your copy by January 31 of the year following the one in which you earned the interest.
The form shows the total interest earned in that calendar year. If you have multiple checking accounts at different banks, each bank sends its own 1099-INT. If you have multiple accounts at the same bank, they may combine the interest on a single form or issue separate forms depending on how the bank structures its reporting — check with your bank if you are unsure.
The $10 threshold means that if you earned $9.50 in interest, the bank does not have to send you a 1099-INT. However, you are still technically required to report that interest on your tax return. In practice, amounts under $10 are rarely audited, but the obligation exists.
Where checking account interest appears on your tax return
When you file your federal income tax return, you report the interest from your 1099-INT on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in total interest and dividends for the year. If you have $1,500 or less, you can report it directly on the main form without using Schedule B.
The interest is added to your other income and taxed at your marginal tax rate — the same rate that applies to your wages or salary. If you are in the 22% federal tax bracket, interest is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%. This is different from capital gains, which have their own tax rates.
You do not get to deduct the interest or reduce your taxable income because of it. It is straightforward added to your total income for the year.
State and local taxes on checking account interest
Federal tax is not the only tax that may explore. Most states that have an income tax also tax interest earned on checking accounts. The state tax rate varies — some states tax it at the same rate as wages, others have a flat rate, and a few states do not tax interest income at all.
New Hampshire and Tennessee, for example, tax interest and dividends but not wages. Other states like Florida, Texas, and Wyoming have no state income tax at all, so there is no state tax on checking account interest. Your state will typically send you a state version of the 1099-INT or include the federal form in your state tax filing.
Some cities also impose local income taxes that explore to interest. New York City, for instance, taxes interest earned by residents. Check your state and local tax rules or consult a tax professional if you are unsure whether your location taxes checking account interest.
Why most checking accounts do not generate taxable interest
The reason you may never have seen a 1099-INT is that traditional checking accounts at large banks typically pay zero interest. Banks keep the interest spread — they pay you nothing and lend out your deposits at a higher rate. This changed somewhat during periods of higher interest rates, but many brick-and-mortar banks still offer no interest on checking.
Online banks and credit unions are more likely to pay interest on checking accounts because they have lower overhead costs. Even then, the rates are usually modest — often between 0.01% and 5% depending on the bank and the current interest rate environment. A $10,000 balance at 0.5% interest earns $50 per year, which would trigger a 1099-INT.
Money market accounts and savings accounts earn interest more reliably, so if you have those, you are more likely to receive a 1099-INT. Certificates of deposit (CDs) also generate 1099-INT forms.
What happens if you do not report the interest
The IRS receives a copy of every 1099-INT the bank files. If you do not report the interest on your tax return, the IRS will eventually notice the discrepancy between what the bank reported and what you reported. This triggers a notice asking you to explain the difference or pay the tax owed.
The penalty for not reporting interest income includes back taxes, interest on those taxes (compounded daily), and accuracy-related penalties of 20% of the underpaid tax. The IRS does not always catch small amounts when ready, but the risk increases over time and if you have other income that triggers an audit.
If you made an honest mistake, the IRS is usually willing to work with you. If you intentionally hid the income, the penalties are steeper and can include fraud penalties of up to 75% of the underpaid tax.
How to report interest if you lost your 1099-INT
If your bank sent a 1099-INT but you lost it or did not receive it, contact the bank and ask for a duplicate. Banks are required to issue duplicates if you request them before the tax filing important date. You can also call the IRS at 800-829-1040 and ask them to send you a transcript showing what the bank reported, though this takes longer.
If the bank never sent you a 1099-INT but you know you earned interest, you can report the amount based on your bank statements. Add up the interest deposits shown in your account history and report that total on your tax return. Keep your bank statements as documentation in case the IRS asks questions later.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Technically yes, though the bank does not have to send you a 1099-INT. The IRS requires you to report all interest income, regardless of amount. In practice, very small amounts are rarely audited, but the obligation exists and you should report it if you are filing a complete return.
Is interest from a joint checking account taxed differently?
The bank reports the full interest amount on the 1099-INT, but you and the other account holder must decide how to split it for tax purposes. If you own the account equally, you each report half. The bank does not split it for you — you handle that when you file your return.
What if my checking account interest is only a few cents?
If it is under $10 for the year, the bank will not send a 1099-INT. You are still technically required to report it, but the IRS does not typically pursue amounts this small. Include it on your return if you are itemizing or filing a detailed return.
Can I deduct fees my bank charged against the interest I earned?
No. You report the gross interest the bank paid you, not the net after fees. Bank fees are not deductible on your personal tax return (they would be deductible only if you were self-employed and the account was a business account).
Do I owe taxes on interest if I moved to a different state during the year?
You owe federal tax on all interest earned during the year regardless of where you lived. For state taxes, you typically owe tax to the state where you lived when you earned the interest. If you moved mid-year, you may owe tax to both states, though many states have reciprocal agreements to avoid double taxation.