Money sitting in a bank account is not taxed just because it’s there. Bank account taxes in the U.S. apply to what your money earns and to a few specific transactions around the account, not to the balance itself. The interest your bank credits you, any sign-up bonus it pays, and situations involving gifts, inheritances, and foreign accounts are where the tax rules bite. Your deposited principal has already been taxed as wages, business income, or investment proceeds before it ever reached the bank, and moving it between accounts changes nothing.
Interest Is Ordinary Income
Every dollar of interest a bank credits to your account is ordinary income for the year it’s credited, whether you withdraw it or leave it in place.1Internal Revenue Service. Topic No. 403, Interest Received That covers savings accounts, checking accounts, money market accounts, and certificates of deposit. It’s taxed at your marginal federal income tax rate, which in 2026 runs from 10% to 37%.2Internal Revenue Service. 1099-INT Interest Income
Timing catches people out. Interest credited in December 2025 is 2025 income, even though the return isn’t filed until 2026. Leaving the money untouched doesn’t defer anything. The income is taxable when it becomes available to you, not when you decide to spend it.1Internal Revenue Service. Topic No. 403, Interest Received
You must report all taxable interest on your federal return, even if the bank never sends you a form.1Internal Revenue Service. Topic No. 403, Interest Received If your total taxable interest for the year exceeds $1,500, you also file Schedule B with your Form 1040.3Internal Revenue Service. 2025 Instructions for Schedule B (Form 1040)
One narrow exception: interest from certain state and local government bonds is generally excluded from federal income tax.4Internal Revenue Service. Introduction to Federal Taxation of Municipal Bonds Unless you specifically hold municipal bonds inside a bank brokerage account, this won’t touch your ordinary savings or checking interest.
Bank Bonuses and Credit Card Rewards
Cash bonuses for opening a new account or hitting a deposit target are taxable. Banks treat them much like interest, and you’ll typically receive either a 1099-INT or a 1099-MISC. Even if no form arrives, the bonus still belongs on your return.
Credit card rewards and cashback earned through spending work differently. The IRS generally treats those as rebates on purchases rather than income, so they don’t create a tax bill.
How Your Bank Reports Interest to the IRS
Banks must file Form 1099-INT with the IRS and send you a copy whenever they pay you $10 or more in interest during the year.5Internal Revenue Service. About Form 1099-INT, Interest Income Below $10, the bank doesn’t have to issue a form, but the income is still taxable and still reportable.1Internal Revenue Service. Topic No. 403, Interest Received
In some situations, your bank withholds tax directly from your interest before crediting it. This backup withholding is set at 24% and applies if you haven’t given the bank a correct Social Security number, or if the IRS has notified the bank that you’ve underreported interest or dividend income before.6Internal Revenue Service. Backup Withholding If it applies to you, you claim credit for the amount withheld when you file.
Joint Bank Accounts
When two or more people share an account, the bank usually reports all the interest on a single 1099-INT issued to the primary account holder’s Social Security number. That doesn’t mean the primary holder owes tax on all of it. The person who received the 1099-INT can reallocate the portion that actually belongs to a co-owner using what the IRS calls a nominee distribution.1Internal Revenue Service. Topic No. 403, Interest Received
The primary holder reports the full 1099-INT amount on Schedule B, then subtracts the co-owner’s share as a nominee distribution. The primary holder also files a separate 1099-INT and a Form 1096 transmittal with the IRS, and sends a copy to the co-owner so that person can report their share.1Internal Revenue Service. Topic No. 403, Interest Received If the co-owner is your spouse and you file jointly, none of this is needed; the income is already on your shared return.
Custodial Accounts and the Kiddie Tax
Interest earned in a custodial account belongs to the child, not the parent. But the IRS limits how much tax benefit families can get by parking investment income in a child’s name.
For 2026, the first $1,350 of a child’s unearned income (bank interest included) is tax-free. The next $1,350 is taxed at the child’s own rate. Anything above $2,700 is taxed at the parent’s marginal rate.7Internal Revenue Service. Rev. Proc. 2025-32 The rule applies to children under 18, and in some cases to children up to age 23 who are full-time students and don’t earn enough to cover half their own support.8Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
When a child’s total unearned income is more than $1,350 but less than $13,500, parents can choose to include it on their own return instead of filing a separate return for the child.7Internal Revenue Service. Rev. Proc. 2025-32 For families with modest custodial balances, this rarely matters. It starts to matter when the account holds substantial savings or CDs.
When Interest Triggers Estimated Tax Payments
If you keep a large balance in a high-yield savings account or a CD ladder, the interest alone can push you past what your paycheck withholding covers. The IRS expects quarterly estimated tax payments if you’ll owe $1,000 or more beyond what’s already withheld.9Internal Revenue Service. Estimated Taxes
You can generally avoid an underpayment penalty by paying at least 90% of your current-year tax liability, or 100% of last year’s tax, whichever is smaller, through withholding and estimated payments combined.9Internal Revenue Service. Estimated Taxes This catches savers off guard when rates are high and balances are large. Worth checking midyear rather than discovering the shortfall in April.
Penalties for Leaving Interest Off Your Return
Because the IRS receives a copy of every 1099-INT, unreported interest is one of the easiest mismatches for its computers to catch. If you leave interest off your return and the IRS finds you were negligent, the accuracy-related penalty is 20% of the underpaid tax.10Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments Interest also accrues on the unpaid balance from the return’s original due date.
For most bank accounts, the amounts involved are modest and the penalty is an annoyance rather than a disaster. But if unreported interest is part of a broader understatement that exceeds the greater of 10% of the correct tax or $5,000, that same 20% penalty applies to the full understatement.10Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
Depositing Money Into Someone Else’s Account
Putting money into another person’s bank account is a gift for federal tax purposes. In 2026, you can give up to $19,000 per recipient per year without any gift tax filing.11Internal Revenue Service. Frequently Asked Questions on Gift Taxes Married couples can effectively double that to $38,000 per recipient through gift-splitting.
Going above $19,000 means filing Form 709, but not necessarily owing gift tax. Amounts above the annual exclusion reduce your lifetime gift and estate tax exemption, which is $15,000,000 per individual in 2026.12Internal Revenue Service. Whats New – Estate and Gift Tax The recipient owes no income tax on the gift itself, though any interest the money later earns is their taxable income.
Bank Balances at Death
When someone dies, every dollar in their bank accounts is part of the gross estate for federal estate tax, valued as of the date of death.13eCFR. 26 CFR 20.2031-5 – Valuation of Cash on Hand or on Deposit For most families this doesn’t produce a federal tax bill because the 2026 federal estate tax exemption is $15,000,000 per individual.12Internal Revenue Service. Whats New – Estate and Gift Tax
State estate taxes are separate. Several states set their own exemption thresholds well below the federal level, so a balance safely under the federal exemption can still be exposed to state estate tax. Check the rules in your state.
Foreign Bank Accounts
If you’re a U.S. citizen or resident with accounts outside the country, the reporting requirements go well beyond a 1099-INT. They apply even when the foreign account earns no interest at all. This is where the biggest surprises live, because the penalties are severe and the thresholds catch ordinary savers who assume the rules only target the wealthy.
FBAR (FinCEN Form 114)
You must file a Report of Foreign Bank and Financial Accounts if the combined balance of all your foreign financial accounts tops $10,000 at any point during the year.14Financial Crimes Enforcement Network (FinCEN). BSA Electronic Filing Requirements for Report of Foreign Bank and Financial Accounts (FinCEN Form 114) The filing goes to FinCEN through the BSA E-Filing system, not to the IRS with your tax return.15Financial Crimes Enforcement Network. How Do I File the FBAR
Penalties for missing this filing are steep. The statutory cap for a non-willful violation is $10,000 per annual report. For willful violations, the penalty jumps to the greater of $100,000 or 50% of the account balance at the time of the violation.16Office of the Law Revision Counsel. 31 USC 5321 – Civil Penalties Those are the base statutory amounts; inflation adjustments push the actual numbers higher each year. Criminal penalties are also possible for willful failures.
FATCA (Form 8938)
A separate obligation under the Foreign Account Tax Compliance Act requires certain taxpayers to report foreign financial assets to the IRS on Form 8938. Thresholds are considerably higher than the FBAR’s $10,000 and depend on your filing status and where you live:17Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets
- Single, living in the U.S.: total foreign assets exceed $50,000 on the last day of the year or $75,000 at any point during the year.
- Married filing jointly, living in the U.S.: total foreign assets exceed $100,000 on the last day of the year or $150,000 at any point during the year.
- Single, living abroad: total foreign assets exceed $200,000 on the last day of the year or $300,000 at any point during the year.
- Married filing jointly, living abroad: total foreign assets exceed $400,000 on the last day of the year or $600,000 at any point during the year.
Failing to file Form 8938 carries an initial $10,000 penalty. If you still don’t file within 90 days after the IRS notifies you, an additional $10,000 accrues for each 30-day period of continued non-compliance, up to $50,000 in additional penalties.18Internal Revenue Service. Instructions for Form 8938 FBAR and Form 8938 are independent obligations with different thresholds, different filing destinations, and separate penalty structures. Accounts abroad often mean filing both.