Interest from your checking account counts as income the IRS taxes

Any interest your bank pays you on a checking account is taxable income. The IRS treats it the same way it treats interest from savings accounts, money market accounts, or certificates of deposit. You report it on your tax return, and you owe federal income tax on it at your ordinary tax rate.

The bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. You use this form to report the interest on your federal tax return. Some states also tax interest income, so you may owe state income tax on it as well.

The amount of interest you earn on a checking account is usually small — most banks pay between 0.01% and 5% annually depending on the account type and current rates — but even small amounts must be reported.

Key Takeaways

  • The IRS requires you to report all checking account interest as income on your tax return, regardless of the amount.
  • Your bank sends a Form 1099-INT if you earned $10 or more in interest during the tax year, but you must report interest below that threshold too.
  • You pay income tax on checking account interest at your ordinary tax rate, which depends on your total income and filing status.
  • Some states tax interest income in addition to federal tax, so check your state's rules.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw money, but interest in a regular checking account is taxed in the year you earn it.

How the IRS knows about your interest income

Banks report interest payments to the IRS automatically using Form 1099-INT. The bank sends a copy to you and files a copy with the IRS. This means the IRS already knows how much interest you earned before you file your return.

If you receive a Form 1099-INT and do not report the interest on your tax return, the IRS will notice the discrepancy when it matches your return against the bank's report. This can trigger an audit or a notice asking you to explain the difference.

Even if you do not receive a Form 1099-INT because your interest was below $10, you are still required to report it. The threshold for sending the form is not the same as the threshold for reporting the income.

What tax rate applies to your interest

Interest income is taxed as ordinary income, meaning it is added to your wages, self-employment income, and other sources of income. Your total income determines which tax bracket you fall into, and that bracket determines your tax rate.

For example, if you earn $50,000 in wages and $200 in checking account interest, your taxable income is $50,200. That extra $200 is taxed at whatever marginal rate applies to your income level. In 2024, for a single filer, that could be 10%, 12%, 22%, or higher depending on your total income.

Interest income does not get any special tax treatment. Unlike long-term capital gains or may have access to dividends, which may be taxed at lower rates, interest is always taxed at your ordinary rate.

Reporting interest on your tax return

You report checking account interest on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest and dividend income combined. If you have $1,500 or less, you can report it directly on Form 1040, line 2b.

The process is straightforward: you enter the total interest from all your accounts (checking, savings, money market, CDs, bonds, and any other interest-bearing accounts) in one place. You do not need to break it down by account type or bank.

If you use tax software, it will walk you through entering the Form 1099-INT information. If you file by hand or with a tax preparer, bring all your 1099-INT forms with you.

State income tax on checking account interest

Most states that have an income tax also tax interest income. The rules vary by state: some tax it at the same rate as federal income tax, some at a different rate, and a few states do not tax interest at all.

States that do not tax interest income include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe federal tax on your checking account interest but not state tax.

If you live in a state that does tax interest, you will report it on your state income tax return. Many state tax forms mirror the federal form and ask for the same information from your 1099-INT.

Interest in tax-advantaged accounts versus regular checking

Interest earned inside a traditional IRA or 401(k) is not taxed in the year you earn it. Instead, you pay tax on the money when you withdraw it in retirement. This is one reason these accounts are valuable for long-term saving.

Interest in a Roth IRA is not taxed at all, as long as you follow the withdrawal rules. Once you turn 59½ and have held the account for at least five years, you can withdraw interest tax-free.

A regular checking account offers no such protection. Interest is taxed in the year you earn it, even if you do not withdraw the money. This is why the interest rates on regular checking accounts are often lower than rates on savings accounts or money market accounts — the tax burden makes them less attractive for building wealth.

What to do if you did not receive a 1099-INT

If you earned $10 or more in interest but did not receive a Form 1099-INT by late January, contact your bank. Ask them to send you a corrected form or a statement showing the interest you earned. Keep a record of this communication.

If the bank cannot locate the form and cannot provide documentation, you can still report the interest based on your own records — your account statements or the interest shown in your online banking portal. The IRS expects you to report interest even without a 1099-INT.

If you report interest that does not match the bank's report to the IRS, the IRS may contact you. Having documentation from your bank or your own records will help you resolve the discrepancy quickly.

Frequently Asked Questions

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

Yes. The $10 threshold is only for when banks must send you a Form 1099-INT. You are required to report all interest income, no matter how small. If you earned $3 in interest, you must report it on your tax return.

Can I deduct the taxes I pay on checking account interest?

No. Interest income is added to your taxable income, but you cannot deduct the tax you owe on it. You pay tax on the full amount of interest at your ordinary rate.

What if my checking account earned interest but the bank did not send a 1099-INT?

Contact your bank and ask for a corrected form or a statement showing the interest. If the bank cannot provide one, report the interest based on your account statements. The IRS expects you to report it either way.

Is interest on a joint checking account taxable to both owners?

The tax treatment depends on how the account is structured and your state's rules. Usually, the person whose Social Security number is listed on the account receives the 1099-INT and reports all the interest. Discuss this with your bank and a tax preparer if you are unsure.

Do high-yield checking accounts change how interest is taxed?

No. High-yield checking accounts pay more interest than traditional accounts, but the interest is still taxed as ordinary income at your regular tax rate. You still report it on Schedule B or Form 1040, line 2b.