Interest on your bank account counts as taxable income to the IRS
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 freelance earnings — you must report it on your tax return, and you may owe federal income tax on it. Most banks send you a Form 1099-INT each January showing how much interest you earned the previous year, and that amount goes on your tax return.
The tax you owe depends on your total income and your tax bracket. If you earned $50 in interest and you're in the 22% tax bracket, you'll owe roughly $11 in federal tax on that interest alone. State and local income taxes may apply too, depending on where you live. The only exception is interest earned in certain retirement accounts like traditional IRAs or 401(k)s, where the interest grows tax-deferred until you withdraw the money.
You report this interest on your federal tax return whether or not the bank sends you a Form 1099-INT. If you earned less than $10 in interest at a single bank, the bank may not send the form, but you still owe tax on it.
Key Takeaways
- Banks report interest over $10 to the IRS on Form 1099-INT, which you receive by January 31 each year.
- You must report all interest income on your federal tax return, even if you earned less than $10 and received no form.
- The tax rate on interest depends on your overall income and tax bracket, not on the interest amount itself.
- Interest in tax-deferred retirement accounts does not trigger immediate tax, but withdrawals from those accounts do.
- Some states and cities tax interest income, while others do not — check your state's rules.
When the bank sends you Form 1099-INT
Your bank will mail or email you a Form 1099-INT by January 31 if you earned $10 or more in interest during the previous calendar year. This form shows the total interest paid to you and goes to the IRS at the same time it goes to you. The IRS uses it to cross-check your tax return, so if you don't report the interest and the IRS sees the 1099-INT, you'll likely receive a notice.
If you earned less than $10 in interest, the bank is not required to send a form, but you still owe tax on that interest. Keep your bank statements as proof of what you earned. If you have accounts at multiple banks, each one sends its own 1099-INT, and you add all the interest together on your return.
The form also shows any federal income tax the bank withheld on your behalf, though most savings accounts do not trigger withholding. If withholding did occur, that amount reduces what you owe at tax time.
How interest income affects your tax bracket and refund
Interest income is added to your other income — wages, self-employment earnings, investment gains — to calculate your total taxable income. Depending on how much interest you earned and what your other income is, it may push you into a higher tax bracket or reduce a refund you were expecting.
For example, if you earned $50,000 in wages and $500 in interest, your taxable income is $50,500. That extra $500 is taxed at your marginal rate — the rate that applies to your last dollar of income. If you're in the 22% bracket, you owe about $110 in federal tax on that interest. If you're in the 12% bracket, you owe about $60.
If you were counting on a refund and didn't account for interest income, the interest may reduce or eliminate that refund. Conversely, if you owe taxes, the interest increases what you owe. This is why it's important to account for all interest when you file or when you adjust your withholding during the year.
Interest in retirement accounts and tax-deferred savings
Interest earned inside a traditional IRA, 401(k), or 403(b) is not taxed in the year it's earned. The money grows tax-free until you withdraw it. At that point, the entire withdrawal — including the interest — is taxed as ordinary income. This is one reason these accounts are valuable: your interest compounds without being reduced by annual taxes.
A Roth IRA works differently. Interest earned in a Roth is never taxed, even when you withdraw it, as long as you follow the withdrawal rules. This makes Roth accounts especially valuable for people who expect to be in a higher tax bracket later.
Certificates of deposit (CDs) held outside retirement accounts are taxable in the year the interest is earned, even if you don't withdraw the money until later. Some CDs pay interest at maturity rather than monthly, but you still owe tax on that interest in the year it's paid.
State and local taxes on interest income
Most states tax interest income as part of your state income tax return. The tax rate varies by state — some states have no income tax at all, while others tax interest at rates up to 13%. A few states offer exemptions for interest earned on certain savings vehicles, but these are rare and usually limited to specific account types or age groups.
Some cities also impose local income tax on interest. New York City, for example, taxes interest as part of its local income tax. If you live in a state or city with income tax, check your local tax authority's website or ask a tax preparer whether interest is taxed and at what rate.
If you moved during the year or earned interest in multiple states, you may need to file returns in more than one state. The rules vary, so it's worth confirming with each state's tax authority.
Reporting interest on your tax return
Interest income goes on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest and dividend income combined. If you have less than that, you can report the interest directly on Form 1040, line 1b. You'll need your Form 1099-INT or your bank statements showing the interest you earned.
If you use tax software, it will walk you through entering the interest amount. If you file by hand or with a tax preparer, bring your 1099-INT forms and any statements showing interest you earned but for which you didn't receive a form.
The IRS matches the interest reported on your return to the 1099-INT the bank sent them. If the numbers don't match, you'll receive a notice asking you to explain the difference. Keeping copies of your 1099-INT forms and bank statements for at least three years protects you if questions come up later.
What to do if you didn't receive a Form 1099-INT
If you earned interest but didn't receive a 1099-INT, contact your bank and ask for a copy. Banks are required to send the form if you earned $10 or more, so if you earned that amount and didn't get one, the bank may have sent it to an old address or it may have been lost in the mail. A replacement copy is usually available within a few business days.
If you earned less than $10 and received no form, you still owe tax on that interest. Look at your bank statements to find the total interest paid and report it on your return. Keep the statements as documentation in case the IRS asks.
If you had multiple accounts at the same bank, the 1099-INT should show the combined interest from all of them. If you had accounts at different banks, each bank sends its own form. Add all the interest together when you file.
Frequently Asked Questions
Do I owe tax on interest if I earned less than $10?
Yes. The $10 threshold only determines whether the bank must send you a Form 1099-INT. You owe tax on all interest income, regardless of the amount. Report it on your tax return using your bank statements as proof.
What if I move money between accounts during the year — do I get taxed twice?
No. Moving money between your own accounts is not a taxable event. You only owe tax on the interest the money earned, not on the principal you moved. Each bank reports only the interest paid by that bank.
Can I deduct interest I paid on a loan from the interest I earned on savings?
No. Interest you earn on savings is income and must be reported. Interest you pay on a loan (like a mortgage or student loan) may be deductible, but it's a separate deduction that doesn't offset your interest income. Mortgage interest and student loan interest have their own deduction rules.
Is interest on a high-yield savings account taxed differently than interest on a regular savings account?
No. The tax treatment is the same regardless of the interest rate or account type. A high-yield savings account pays more interest, so you owe more tax on it, but the rules are identical. Both are reported on Form 1099-INT and taxed as ordinary income.
What happens if the bank withholds taxes from my interest?
The withheld amount appears on your Form 1099-INT and reduces your tax liability. If too much was withheld, you'll get a refund. If too little was withheld, you'll owe more at tax time. The withholding is credited against what you owe, so it's not an extra tax — it's a prepayment.