New Jersey does not tax interest earned in a savings account
New Jersey has no state income tax on interest income. This means the interest your savings account earns is not subject to New Jersey state tax, regardless of how much you earn or where your bank is located. You will not owe New Jersey state tax on this money.
However, you will still owe federal income tax on savings account interest. The federal government taxes all interest income, and you report it on your federal tax return each year. Your bank will send you a form called a 1099-INT if you earned $10 or more in interest during the year, though you may owe federal tax even if you do not receive this form.
Some people confuse state and federal taxes. New Jersey's lack of a state income tax is one of its defining features — it applies to wages, investment income, and interest alike. But this does not mean you avoid all taxes on your savings; it only means you avoid the state portion.
Key Takeaways
- New Jersey residents pay no state income tax on savings account interest, unlike residents of most other states.
- You still owe federal income tax on all interest earned, which you report on your federal tax return using the 1099-INT form your bank sends you.
- The amount of federal tax you owe depends on your total income and your tax bracket, not on the size of your savings account.
- If you move to another state, that state may tax your savings interest, so the tax treatment of your account can change based on where you live.
How federal tax on savings interest works
The federal government treats savings account interest as ordinary income. This means it is taxed at the same rate as your wages or salary, based on your total income for the year. If you earn $30,000 in wages and $500 in interest, the federal government taxes you on $30,500 of income.
Your tax bracket — the percentage of your income you owe in federal tax — depends on how much you earn in total. Someone earning $20,000 per year pays a lower percentage than someone earning $80,000. The interest you earn pushes your total income higher, which can move you into a higher bracket if you are close to the edge.
You report this interest on Schedule B of your federal tax return (Form 1040), which is where you list all interest and dividend income. If your interest is less than $1,500 for the year, you can report it directly on the main form without using Schedule B, but the process is the same.
When your bank sends you a 1099-INT form
Your bank is required to send you a 1099-INT form if you earned $10 or more in interest during the calendar year. The form arrives by January 31 of the following year and shows the total interest you earned at that bank during the previous year.
If you have accounts at multiple banks, each bank sends its own 1099-INT. You will receive one form from each institution where you earned at least $10 in interest. This means you may receive several forms if you have savings accounts at different banks.
Even if you do not receive a 1099-INT because you earned less than $10 in interest, you still owe federal tax on that interest if you have any tax liability at all. The $10 threshold is only about when the bank must send the form, not about when you owe tax.
What happens if you earn very little interest
If your savings account earns only a small amount of interest — say, $5 or $15 — you still owe federal tax on it, but the amount may be negligible. At current federal tax rates, $15 in interest might result in $2 to $4 in federal tax, depending on your bracket.
You are still required to report this income on your tax return, even though it is small. The IRS does not have a minimum threshold below which you can ignore interest income; the $10 threshold only determines whether your bank sends you a form.
Many people with small savings accounts find that their interest income is so low that it has almost no effect on their tax bill. This is especially true if you are in a lower tax bracket or if your savings account earns very little interest because rates are low.
How interest rates affect your tax bill
The amount of interest your account earns depends on the interest rate your bank offers and how much money you keep in the account. Higher interest rates mean more interest earned, which means more federal tax owed. A savings account earning 4% interest will generate more taxable income than one earning 0.5% interest.
This is one reason some people choose high-yield savings accounts — they earn more interest, which means more money in your pocket even after you pay federal tax on it. A high-yield account earning 4% on $10,000 generates $400 in interest per year. After federal tax (which might be $60 to $100 depending on your bracket), you still have $300 to $340 more than you started with.
You cannot avoid federal tax by moving your money to a low-interest account. The tax is on the interest you earn, not on the account itself. If you earn interest, you owe tax on it, regardless of how small the amount is.
What changes if you move out of New Jersey
If you move to another state, that state may tax your savings account interest. Most states have a state income tax that applies to interest income the same way the federal government does. Only a handful of states — New Hampshire, Tennessee, and a few others — have no income tax on interest.
Your tax situation changes based on where you live on December 31 of the tax year. If you move to Pennsylvania on July 1, you owe Pennsylvania state tax on the interest you earn from July 1 onward, but not on interest earned before you moved. Your bank does not automatically know you moved, so you may need to update your address and tax withholding information.
If you are considering a move, it is worth understanding the tax treatment of savings interest in your new state. Some states tax interest at a higher rate than others, which can affect how much of your savings growth you keep.
Frequently Asked Questions
Do I have to report savings interest if I earned less than $10?
Yes. The $10 threshold only determines whether your bank sends you a 1099-INT form. You must report all interest income on your federal tax return, even if it is $2 or $5. However, the tax owed on very small amounts is usually minimal.
Can I deduct anything from my savings interest before paying tax?
No. Interest income is taxed as ordinary income with no deductions specific to savings accounts. You report the full amount your bank paid you. You may be able to deduct other expenses (like investment fees) on your tax return, but these are separate from your interest income.
What if I earned interest at a bank outside New Jersey?
It does not matter where the bank is located. If you are a New Jersey resident, you owe no New Jersey state tax on the interest, regardless of which bank paid it. You still owe federal tax on all interest earned, no matter where the account is.
Do I need to pay estimated taxes on my savings interest?
Only if your total tax liability is large enough. Most people with savings accounts do not earn enough interest to require estimated tax payments. If you have other income sources (like self-employment income) that already require estimated payments, you may need to account for interest income in those payments.
Is interest from a money market account taxed differently than a savings account?
No. Money market accounts, savings accounts, and certificates of deposit (CDs) are all taxed the same way at both the state and federal level. New Jersey taxes none of them at the state level, and the federal government taxes all of them as ordinary income.