Bank account interest counts as income the IRS taxes

Yes. Any interest your bank pays you on a savings account, money market account, or certificate of deposit (CD) is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on it, and depending on where you live, you may owe state income tax too.

The bank will send you a form called a 1099-INT (Interest Income) at the end of each year if you earned $10 or more in interest. You then report that amount on your tax return. Even if the bank does not send you a 1099-INT because your interest was under $10, you still owe tax on it — you just have to report it yourself.

This applies to all types of interest-bearing accounts. A high-yield savings account that pays 4% interest is taxed the same way as a traditional savings account that pays 0.01%. The rate does not matter; the fact that it is interest does.

Key Takeaways

  • The IRS taxes all bank account interest as ordinary income at your regular tax rate, regardless of the account type or interest rate.
  • Your bank sends you a 1099-INT form if you earned $10 or more in interest during the year, which you use to report the income on your tax return.
  • You must report interest income even if you do not receive a 1099-INT, such as when interest is under $10 or earned at a bank that does not issue the form.
  • Interest earned in accounts held for a minor child may be taxable to the child or the parent depending on the child's total income and the account structure.

How the IRS taxes interest at your regular tax rate

Interest income is taxed as ordinary income, which means it is added to your other income (wages, self-employment income, rental income, and so on) and taxed at whatever rate applies to your total income for the year. If you are in the 22% tax bracket, interest is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%.

This is different from long-term capital gains, which have their own lower tax rates. Interest is never taxed as a capital gain, no matter how long the money sits in the account. A dollar of interest earned in January is taxed the same way as a dollar earned in December.

The amount of tax you owe depends on your total income for the year, your filing status (single, married filing jointly, head of household, and so on), and whether you claim the standard deduction or itemize deductions. A tax professional or tax software can help you calculate the exact amount, but the key point is that interest pushes your total income higher, which may push you into a higher tax bracket.

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

Banks and credit unions send a 1099-INT to you and to the IRS if you 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.

You report this amount on your tax return. If you file Form 1040 (the main individual income tax form), you report interest income on Schedule 1, which feeds into your total income. If you use tax software, it will walk you through entering the 1099-INT information. If you work with a tax preparer, bring the form with you.

Keep your 1099-INT with your tax records for at least three years. The IRS receives a copy, so if your return is audited, you will need to show that you reported the amount correctly.

Interest under $10 and accounts at banks that do not issue 1099-INT

If you earned less than $10 in interest during the year, the bank is not required to send you a 1099-INT. However, you still owe tax on that interest. You must report it on your tax return even though you do not have a form from the bank.

Some very small banks, credit unions, or online banks may not issue 1099-INT forms at all, even if you earned more than $10. In that case, you can ask the bank for a statement showing the interest paid, or you can calculate it yourself from your account statements. Report the amount on your tax return under interest income.

The IRS does not have a record of this interest (because the bank did not report it), but you are still legally required to report it. Failing to do so is underreporting income, which can result in penalties and interest if the IRS discovers the omission.

Interest in accounts for children and dependents

Interest earned in a savings account held in a child's name is taxable to the child, not the parent. However, the tax owed depends on the child's total income for the year.

A child with very little other income may owe no tax at all because their income falls below the standard deduction. For 2024, a dependent child with only interest income owes no federal income tax unless that interest exceeds roughly $1,400 (this amount changes each year). If the child has wages or other income, the threshold is different.

If the interest does exceed the threshold, the child must file a tax return and report it. The parent cannot claim the interest as their own income. Some parents use a Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) account specifically because the child's lower tax bracket means less tax is owed on the interest, though this strategy has limits and can affect financial aid.

State income tax on bank interest

In addition to federal income tax, most states tax interest income. The state tax rate and rules vary widely. Some states have no income tax at all (including Florida, Texas, and Wyoming), so residents of those states owe federal tax on interest but no state tax.

Other states tax interest at a flat rate, while some use a graduated system similar to federal tax. A few states exempt certain types of interest income — for example, some exempt interest from U.S. Treasury bonds — but interest from a bank account is almost always taxable at the state level in states that have an income tax.

If you live in a state with income tax, your state tax return will ask for interest income. You report the same amount you reported to the IRS. Check your state's tax authority website or ask a tax preparer about your state's specific rules.

Frequently Asked Questions

Do I have to pay taxes on interest if I only earned a few dollars?

Yes. Any interest is taxable income, even if it is $1. If the bank does not send you a 1099-INT because the amount is under $10, you still report it on your tax return. The amount is small, but the legal requirement is the same.

What if I move money between my own accounts — is that interest?

No. Moving money from one account to another is not income. Only the interest the bank pays you is taxable. If you transfer $5,000 from checking to savings, that is not a taxable event.

Can I deduct the taxes I pay on interest from my interest income?

No. You report the full interest amount as income and then pay tax on it at your regular rate. You cannot reduce the interest income by the amount of tax you owe. However, if you paid estimated taxes or had taxes withheld, those reduce your overall tax bill.

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

No. A certificate of deposit (CD) interest is taxed the same way as savings account interest — as ordinary income at your regular tax rate. The only difference is that you report it on the same 1099-INT form the bank sends you.

What if my bank made an error and paid me too much interest?

You still owe tax on the interest the bank actually paid you. If the bank later corrects the error and takes back the overpayment, you may be able to amend your tax return to report the correct amount. Contact a tax preparer or the IRS if this happens.