Yes, the interest your bank pays you is taxable income
The money your bank pays you for holding a deposit account is taxable income to the IRS. You owe federal income tax on it. Most states tax it too. The bank does not withhold the tax automatically — you report it yourself when you file your tax return.
The amount matters less than you might think. At current interest rates, you would need a very large balance to owe significant tax. But even small amounts count, and the IRS expects you to report them. The bank will send you a form documenting what you earned, and the IRS gets a copy of that form too.
Key Takeaways
- Banks report interest paid to you on Form 1099-INT, which goes to both you and the IRS.
- You report this interest as income on your federal tax return, even if the amount is small.
- Most states also tax bank interest as ordinary income, though a few states do not tax interest income at all.
- The interest is taxed at your ordinary income tax rate, not at a special capital gains rate.
- If you earned less than $10 in interest from a single bank in a year, the bank may not send you a 1099-INT, but you still owe tax on it if you file a return.
How the IRS knows about your interest
Your bank tracks every dollar of interest it credits to your account. At the end of each calendar year, the bank prepares a Form 1099-INT listing the total interest paid to you. The bank mails you a copy and sends an identical copy to the IRS.
The IRS matches the 1099-INT it receives from the bank against the income you report on your tax return. If you do not report the interest, the IRS will notice the mismatch. This is one of the most straightforward forms of income to verify because the bank reports it automatically.
If you earned less than $10 in interest from a single bank during the year, the bank is not required to send you a 1099-INT. However, you still owe tax on that interest if you file a return. You report it based on your own records — your bank statements or the interest shown in your online account.
What tax rate applies to bank interest
Bank interest is taxed as ordinary income, meaning it is taxed at the same rate as wages, salary, or other regular income. It does not receive the lower tax rates that explore to long-term capital gains or may have access to dividends.
Your tax rate depends on your total income for the year and your filing status. If you are in the 22% federal tax bracket, bank interest is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%. The interest itself does not change your bracket — it is straightforward added to your other income and taxed accordingly.
This matters because even a small amount of interest can push you into a higher tax bracket if your income is close to a bracket boundary. For most people with ordinary savings accounts, the effect is minimal. For someone with a very large balance earning substantial interest, it can be meaningful.
State income tax on bank interest
Most states tax bank interest as ordinary income at their standard state income tax rate. If your state has a 5% income tax and you earn $100 in bank interest, you owe $5 in state tax on top of your federal tax.
A handful of states do not tax interest income at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — none of which have a state income tax. New Hampshire and Tennessee tax only interest and dividend income, not wages, though Tennessee is phasing this out.
If you live in a state with income tax and earn interest in an account at a bank in a different state, you still owe tax to your state of residence, not the state where the bank is located. Your state of residence is where you live for most of the year.
When you need to report interest on your tax return
You report bank interest on Schedule B of Form 1040 (your main federal income tax form) if your interest income exceeds $1,500 for the year. If your interest is $1,500 or less, you can report it directly on Form 1040 without using Schedule B.
You must file a tax return if your income exceeds the threshold for your age and filing status. For 2023, a single person under 65 must file if their gross income is $13,850 or more. If your only income is $500 in bank interest and you have no other income, you are not required to file — but you may want to file anyway if taxes were withheld from other sources, because you could get a refund.
If you have multiple accounts at different banks, add up all the interest from all accounts and report the total. The IRS will receive separate 1099-INT forms from each bank, so make sure your total matches the sum of all the forms they send you.
Interest from different account types
The tax treatment is the same regardless of the account type. Interest from a regular savings account, a money market account, a certificate of deposit (CD), or a high-yield savings account is all taxable ordinary income. The account name does not matter — only whether the bank paid you interest.
Interest paid on a CD is taxable in the year you receive it, even if you do not withdraw the money. If you have a one-year CD that matures in December, you owe tax on the interest that year, not when you cash it in the following year. Some CDs pay interest monthly or quarterly; you owe tax on each payment as you receive it.
Interest from an IRA or 401(k) is not taxable when earned because those accounts are tax-deferred. You owe tax only when you withdraw money from the account. Interest from a Roth IRA is never taxable, even when you withdraw it, as long as you follow the withdrawal rules.
Keeping records for tax time
Save your 1099-INT forms from your bank. You will receive them by January 31 of the year following the tax year. If you do not receive a 1099-INT by early February, contact your bank — they may have the wrong address on file.
Keep your bank statements for the year as backup documentation. If the IRS ever questions your return, you can show your statements to prove the interest amount. You do not need to submit statements with your return, but keep them for at least three years in case of an audit.
If you earned interest from multiple banks, gather all the 1099-INT forms before you file. Add them up to make sure the total matches what you report on your return. If one bank reports $500 and another reports $300, your total should be $800.
Frequently Asked Questions
Do I have to report bank interest if it is only a few dollars?
Yes, if you file a tax return, you must report all interest income, even if it is $5 or $10. The IRS does not have a minimum threshold for reporting — only for whether the bank must send you a 1099-INT (which is $10). If you file a return, report what you earned.
What if my bank sent me a 1099-INT but I think the amount is wrong?
Contact your bank and ask them to review the calculation. If they made an error, they will send you a corrected 1099-INT (marked as a correction). If the amount is correct but you disagree, you still report what the 1099-INT says on your tax return — the IRS has a copy and will match it.
Can I deduct expenses to offset bank interest income?
No. Bank interest is reported as gross income with no deductions. You cannot deduct account fees, investment advisory costs, or other expenses against interest income. Those expenses may be deductible elsewhere on your return if they meet other requirements, but not as an offset to interest.
Is interest from a joint account taxable to both owners?
The person whose Social Security number is on the account receives the 1099-INT and reports the interest. If the account is truly joint and both owners contributed equally, you may need to split the interest between you for tax purposes, but the bank will report it to only one person. Discuss this with a tax professional if you have a joint account.
What happens if I do not report bank interest on my tax return?
The IRS will see the 1099-INT the bank sent them and notice that you did not report it. They may send you a notice asking for the missing income, plus interest and penalties. It is simpler and cheaper to report it correctly when you file.