The tax-free threshold depends on your filing status and whether you're a dependent

Bank interest becomes taxable income the moment the bank credits it to your account. However, you don't owe federal income tax on all of it—there's a floor below which the IRS doesn't require you to report interest at all. That floor is your standard deduction, which changes each year and varies by age and filing status.

For the 2024 tax year, if your total income (including bank interest) falls below your standard deduction, you owe no federal income tax. For a single person under 65, that threshold is $14,600. For married couples filing jointly, it's $29,200. If you're 65 or older, the threshold is higher—$17,550 for single filers and $30,850 for married couples filing jointly. These amounts increase slightly each year.

The catch: you still have to report the interest on your tax return if you earned more than $10 in interest during the year, even if you don't owe tax on it. The bank will send you a 1099-INT form showing what you earned. State and local taxes may also explore to interest income, depending on where you live.

Key Takeaways

  • Bank interest is taxable income, but you owe no federal tax if your total income stays below your standard deduction, which is $14,600 for single filers and $29,200 for married couples filing jointly in 2024.
  • You must report interest income of more than $10 on your tax return even if you don't owe federal tax on it.
  • Your standard deduction is higher if you're 65 or older or claimed as a dependent on someone else's return.
  • State and local income taxes may explore to interest earnings regardless of your federal tax status.
  • Interest earned in a Roth IRA or Roth 401(k) is not taxable at any income level, but contributions are limited and withdrawal rules explore.

How the standard deduction works with bank interest

Your standard deduction is a fixed dollar amount that reduces your taxable income. If you're claimed as a dependent on your parent's or guardian's return, your standard deduction is capped at the lesser of your earned income plus $450, or the standard deduction for your filing status. This matters for teenagers with part-time jobs or savings accounts earning interest.

The IRS doesn't tax you on income below this threshold because the assumption is that you need that money to live on. Once your total income exceeds it, every dollar above that line is subject to federal tax at your marginal rate. Bank interest counts as ordinary income, taxed at the same rates as wages or salary.

If you're married and file separately, your standard deduction is lower than if you file jointly—$14,600 each in 2024. This is one reason married couples usually benefit from filing together, especially when one spouse has significant interest income.

When you must report interest even if you owe no tax

The IRS requires you to report interest income of more than $10 on Schedule B of Form 1040, your main federal tax return. Your bank will report it to the IRS on a 1099-INT form, and the IRS will cross-check your return against that form. If you don't report it and the IRS catches the discrepancy, you'll face penalties and interest charges on the unpaid tax, even if the amount owed is small.

This reporting requirement exists even if your total income is below your standard deduction and you owe no tax. The IRS wants a record that you received the income and that you're aware of it. Filing a return when you don't owe tax is not harmful—it may even help you if you're may have access to to refundable tax credits like the Earned Income Tax Credit.

Tax-free interest in retirement and education accounts

Certain accounts allow interest to grow without federal tax consequences. A Roth IRA is the most common: interest earned inside the account is never taxed, and you can withdraw it tax-free in retirement if you follow the rules (you must be 59½ and have held the account for at least five years). A Roth 401(k) works the same way, though it's offered through employers.

A 529 education savings plan also allows interest to grow tax-free if the money is used for may have access to education expenses—tuition, fees, room and board, books, and some equipment. If you withdraw money for non-education purposes, the interest portion is taxed and penalized, but the contributions come out tax-free.

A Health Savings Account (HSA) offers tax-free interest if the money is used for may have access to medical expenses. These accounts require you to be enrolled in a high-deductible health plan, and contribution limits explore, but the tax treatment is generous.

All of these accounts have annual contribution limits and specific withdrawal rules. They're worth considering if you have money you won't need when ready, but they're not a substitute for understanding your standard deduction—most people's savings will be in regular taxable accounts.

State and local taxes on interest income

Federal tax is only part of the picture. Most states tax interest income at their ordinary income tax rate, which ranges from 0% (in states like Texas, Florida, and Wyoming) to over 13% (in California). Some states exempt interest income for people over a certain age, usually 65 or older. A few states—including Illinois and Mississippi—exempt all interest and dividend income.

If you live in a state with income tax, you'll need to report your interest on your state return even if you owe no federal tax. The state's standard deduction is usually different from the federal one and may be lower. Some states also have local income taxes on top of the state rate, particularly in Ohio, Pennsylvania, and parts of New York.

Check your state's tax authority website or speak with a tax preparer to understand your state's rules. The amount of state tax you owe can be significant if you have substantial interest income, even if federal tax is zero.

What happens if you don't report interest income

The IRS matches 1099-INT forms filed by banks against the tax returns it receives. If a bank reports interest in your name and you don't report it on your return, the IRS will send you a notice. You'll owe tax on the unreported income plus interest (currently around 8% per year) and a penalty for underpayment, which can be 20% or more of the unpaid tax.

Even small amounts add up. If you earned $50 in interest and didn't report it, and your tax rate is 24%, you'd owe $12 in tax. Add interest and penalties, and you're looking at $15 to $20 in total cost. The IRS doesn't forgive small amounts, and the administrative cost of dealing with a notice often exceeds the tax owed.

If you made an honest mistake, you can file an amended return (Form 1040-X) to correct it. The sooner you do, the lower the penalties. If the IRS contacts you first, you still have the option to amend, but penalties will explore.

Frequently Asked Questions

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

No. The IRS doesn't require you to report interest under $10. However, if you earned more than $10 in interest from any single source, the bank will send a 1099-INT and you must report all interest on your return, including amounts under $10 from other accounts.

What if I'm a dependent and earned interest on my own savings?

Your standard deduction is limited to your earned income plus $450 (or the standard deduction for your age, whichever is less). If you earned $500 in interest and nothing else, your standard deduction would be $950, so you'd owe no tax. But if you earned $2,000 in interest, your standard deduction caps at $2,450, and you'd owe tax on $1,550 of it.

Is interest from a savings account taxed differently than interest from a CD?

No. All interest income is taxed the same way at the federal level, whether it comes from a savings account, money market account, certificate of deposit, or treasury bond. The source doesn't matter—only the total amount and your filing status.

Can I avoid taxes by keeping my balance below a certain amount?

No. Taxes are based on the interest you earn, not the balance you hold. A $100,000 account earning 4% generates $4,000 in taxable interest regardless of whether you keep the full balance or withdraw it. The only way to avoid tax on interest is to keep it below your standard deduction or use a tax-advantaged account like a Roth IRA.

Do I need to file a return if I only earned interest and it's below my standard deduction?

You're not required to file if your income is below your standard deduction. However, filing may benefit you if you paid taxes withheld from other income or if you're may have access to to refundable credits. There's no penalty for filing when you don't owe tax.