Maryland does not tax interest earned in savings accounts

Maryland has no state income tax on interest income, including interest from savings accounts, money market accounts, or certificates of deposit. This applies whether the account is held at a bank, credit union, or online institution. The interest you earn stays yours without a state tax bite.

However, you will still owe federal income tax on that interest. The IRS requires you to report all interest income on your federal tax return, even if the amount is small. Your bank will send you a Form 1099-INT if you earn $10 or more in interest during the tax year, though you must report interest income regardless of whether you receive a form.

Some people confuse Maryland's lack of a state income tax with a complete tax exemption. That is not the case. The state simply does not collect income tax at all—on wages, interest, capital gains, or other sources. Federal tax still applies.

Key Takeaways

  • Maryland residents pay no state income tax on savings account interest, but federal income tax still applies to that interest.
  • You must report all interest income to the IRS on your federal tax return, even amounts under $10.
  • Banks send Form 1099-INT when interest reaches $10 in a calendar year, but the reporting requirement exists regardless.
  • Interest from savings accounts, money market accounts, and CDs all follow the same Maryland tax treatment.

How federal tax on interest works

Interest income is taxed as ordinary income at your federal tax rate. If you are in the 22% federal tax bracket, you pay 22% of your interest earnings to the IRS. The rate depends on your total income for the year, not just the interest itself.

The bank does not withhold federal tax from interest automatically. You are responsible for setting aside money to pay the tax when you file your return, or you can adjust your withholding on other income (like wages) to cover it. If you do not pay enough tax throughout the year, you may owe a penalty when you file.

Interest compounds over time, so the amount you owe tax on grows each month. A savings account earning 4% annual interest on $10,000 generates $400 in taxable income per year. That $400 is added to your other income and taxed at your marginal rate.

Reporting interest on your tax return

You report interest income 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 $1,500, you can report the interest directly on Form 1040 line 1b. The IRS matches your report to the Form 1099-INT your bank sends them, so accuracy matters.

If you did not receive a Form 1099-INT but earned interest, you still must report it. This happens with some credit union accounts or if interest fell below the $10 reporting threshold. Keep your own records of interest earned so you can report it accurately.

Filing electronically reduces the chance of errors. Tax software will prompt you to enter interest income and will calculate the correct line placement for you.

When interest income affects other tax situations

Interest income can push you into a higher tax bracket or affect your may be able to access for certain tax credits. If you are close to an income threshold for a credit like the Earned Income Tax Credit or the Child Tax Credit, additional interest income might reduce or eliminate that credit.

Interest also counts toward the income limits for Roth IRA contributions and for deducting traditional IRA contributions. If you are self-employed or a business owner, interest income does not count as self-employment income, so it does not trigger self-employment tax.

Some people use this to their advantage by moving money between account types strategically. For example, keeping savings in a high-yield account for a year and then moving it to a Roth IRA the next year can spread the tax impact across two years.

Strategies to reduce federal tax on interest

One approach is to hold savings in a Roth IRA or traditional IRA. Interest earned inside these accounts is not taxed annually—you only pay tax when you withdraw the money (or never, in the case of a Roth). The trade-off is that IRAs have contribution limits and withdrawal rules.

Another option is to use a Health Savings Account (HSA) if you have a high-deductible health plan. Interest in an HSA grows tax-free and is never taxed if you use the money for medical expenses. HSAs have lower contribution limits than IRAs but offer triple tax advantages.

For very large savings, some people use Series I Savings Bonds, which earn interest that is not taxed by Maryland and can be deferred federally for up to 30 years. However, these bonds have purchase limits and lock-in periods.

Maryland tax forms and resources

Maryland does not require a separate state tax return for interest income because there is no state income tax. You only file your federal return with the IRS. If you live in Maryland and work in another state, that other state may tax your interest, but Maryland will not.

The Maryland Department of Revenue does not issue guidance on interest taxation because it does not apply. If you have questions about your federal tax on interest, the IRS website (irs.gov) has publications on interest income, and you can call the IRS at 1-800-829-1040.

Some Maryland residents use tax software like TurboTax or TaxAct, which will guide you through reporting interest correctly. If you use a tax professional, bring your Form 1099-INT and any records of interest earned.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether your bank sends you a Form 1099-INT. You must report all interest income to the IRS, regardless of amount. Keep your own records if you earn interest below $10.

What if I have savings accounts in multiple banks?

Each bank reports interest separately on its own Form 1099-INT. You add up all the interest from all accounts and report the total on your federal return. The IRS receives copies of all your 1099-INTs and matches them to your return.

Does Maryland tax interest from out-of-state accounts?

No. Maryland taxes no interest income, whether the account is in Maryland or another state. However, if you live in Maryland but work in a state with income tax, that state may tax your interest. Check the rules of any state where you earn wages.

Can I deduct savings account interest as a loss?

No. Interest income is not deductible. You report it as income and pay tax on it. You cannot offset it with other losses unless those losses are from investments or business activities.

What happens if I do not report interest income?

The IRS will notice when your Form 1099-INT does not match your return. You will receive a notice and owe the tax plus interest and potentially penalties. It is simpler and cheaper to report the interest when you file.