Yes, interest from a bank account is taxable income
The IRS treats interest earned in a savings account, money market account, or certificate of deposit (CD) as ordinary income. You owe federal income tax on it at your regular tax rate, the same rate you pay on wages or salary. Most banks send you a Form 1099-INT each January showing how much interest you earned the previous year, and you report that amount on your tax return.
The amount of interest that triggers a tax obligation is small. You do not owe federal tax on interest unless your total interest income for the year exceeds $10 (though your bank may still send you a 1099-INT if you earned any interest at all). State income tax rules vary—some states tax all interest income, others tax none, and some have their own thresholds.
The practical impact depends on how much money you have saved. A savings account earning 4% annual interest on $5,000 generates $200 in taxable income. On $50,000, it generates $2,000. If you are in the 22% federal tax bracket, that $200 costs you $44 in federal tax; the $2,000 costs you $440.
Key Takeaways
- Bank interest is taxed as ordinary income at your regular federal tax rate, reported on Form 1099-INT sent by your bank each January.
- You have no federal tax obligation on interest income below $10 per year, though state rules differ and some states tax all interest.
- The tax you owe depends on your total income and tax bracket, not on the interest amount alone.
- Interest from savings accounts, money market accounts, and CDs all count as taxable income; interest from Roth IRAs and certain other retirement accounts does not.
- If you earn interest in multiple accounts or at multiple banks, you report the combined total on your tax return.
How the IRS knows about your interest income
Banks report interest to the IRS using Form 1099-INT. Your bank sends you a copy (usually by January 31) and files another copy with the IRS. The form shows the account number, the bank's name, and the total interest paid during the year. If you earned interest at more than one bank, you receive a separate 1099-INT from each one.
The IRS matches the 1099-INT forms it receives from banks against the income you report on your tax return. If you report less interest than the bank reported, or if you do not report the interest at all, the IRS notices the discrepancy. This is one of the most straightforward audits to trigger because the numbers come directly from the bank, not from your own records.
You must report all interest income even if you do not receive a 1099-INT. If a bank fails to send the form, or if you earned interest below the $10 threshold and the bank did not issue one, you still owe tax on that interest and must report it yourself.
Interest that is not taxable
Interest earned inside certain retirement accounts is not taxable in the year you earn it. Money in a traditional IRA, Roth IRA, 401(k), or similar account can earn interest without triggering an when ready tax bill. With a Roth IRA, the interest is never taxed. With a traditional IRA or 401(k), you pay tax later when you withdraw the money in retirement.
Interest from municipal bonds (bonds issued by states and cities) is usually exempt from federal income tax, though it may be subject to state tax depending on where you live and where the bond was issued. This is a specialized investment, not a bank account product, but it is worth knowing if you are considering where to put savings.
Interest from U.S. savings bonds (Series EE or Series I bonds) is also federal-tax-deductible if you use the money to pay for may have access to education expenses in the same year you redeem the bonds. Otherwise, it is taxable.
What happens if you earn interest in multiple accounts
If you have savings accounts at three different banks, or a savings account and a CD at the same bank, you add up all the interest from all the accounts and report the total on your tax return. Each bank sends its own 1099-INT, but you combine the numbers when you file.
The same rule applies if you earn interest on money you hold in trust for someone else, or interest on an inheritance before it is distributed. All of it counts as your income for tax purposes unless you are the trustee of a formal trust account, in which case the trust itself may owe the tax instead of you (this is a specialized situation that requires a tax professional).
How your tax bracket affects what you owe
The tax you pay on interest income depends on your total income for the year and your tax bracket. If you earned $50,000 in wages and $2,000 in interest, the IRS treats that $2,000 as if it is the last dollars you earned, taxed at your marginal rate—the rate that applies to your highest income.
For 2024, the federal tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, depending on your total income and filing status. A single person with $50,000 in total income falls into the 22% bracket, so the $2,000 in interest costs roughly $440 in federal tax. A single person with $200,000 in total income falls into the 35% bracket, so the same $2,000 in interest costs roughly $700.
State income tax adds to the federal amount. Most states tax interest income at their regular income tax rate, which ranges from 0% (in states with no income tax) to over 13% (in a few high-tax states). You report state interest income on your state tax return, usually on the same form where you report other income.
Reporting interest on your tax return
On the federal side, you report interest income on Schedule 1 (Form 1040), which feeds into your main tax return. You list the total interest from all sources in one line. If you received a 1099-INT, attach a copy to your return (or keep it for your records if you file electronically).
If you earned less than $1,500 in interest for the year, you can report it directly on Form 1040 without using Schedule 1. If you earned $1,500 or more, you must use Schedule 1 and list each source of interest separately.
On the state side, the process varies. Some states have a separate interest income line on their state tax form. Others ask you to report all income together. Check your state's tax form or website to see where interest goes.
Interest income and tax withholding
Banks do not withhold income tax from interest payments. The interest is deposited into your account in full, and you are responsible for setting aside money to pay the tax when you file your return. This is different from wages, where your employer withholds tax automatically.
If you expect to owe a large amount of tax on interest income (or other income), you can make estimated tax payments to the IRS four times a year to avoid owing a big bill at tax time. This is most relevant if you are self-employed or have significant investment income, but it applies to anyone who expects to owe more than $1,000 in tax.
If you do not pay enough tax throughout the year, either through withholding or estimated payments, the IRS may charge you a penalty when you file. The penalty is small (usually a few dollars), but it is another reason to report interest income accurately and on time.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
You have no federal tax obligation on interest below $10, and your bank will not send you a 1099-INT. However, if you earned any interest at all, some states require you to report it. Check your state's tax rules or ask a tax professional about your state's threshold.
What if my bank did not send me a 1099-INT but I earned interest?
You still owe tax on the interest and must report it on your return. Banks are required to send a 1099-INT if you earned $10 or more, but mistakes happen. If you have bank statements showing the interest, use those to report the amount. If the IRS later receives a corrected 1099-INT from the bank, you may need to file an amended return.
Is interest from a joint account taxable to both people?
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 people contributed equally, you may need to split the interest income between you for tax purposes, but the bank reports it to only one person. Consult a tax professional if you are unsure how to handle a joint account.
Can I deduct the tax I pay on interest income?
No. Interest income is taxable, and you cannot deduct the tax you pay on it. You can deduct investment expenses (like fees paid to a financial advisor) in some cases, but not the income tax itself.
Does interest from a high-yield savings account get taxed differently?
No. A high-yield savings account earns more interest than a traditional savings account, but the tax treatment is identical. All the interest is taxable at your regular rate, reported on a 1099-INT, and added to your other income on your tax return.