Yes, you do pay taxes on a money market account. The interest from a bank money market account and the dividends from a money market mutual fund are both treated as ordinary income, meaning they get added to your wages and other earnings and taxed at your regular federal rate. For 2026, that rate ranges from 10% to 37% depending on your total taxable income.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Most states tax the income too. A few situations soften the bill, and one surtax makes it worse for high earners.
Bank Money Market Accounts
A money market account at a bank or credit union works like a savings account that usually pays a higher yield. The interest you earn is ordinary income under the federal tax code, which lists interest as one of the categories included in gross income.2Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined That puts your money market interest in the same tax bucket as your paycheck.
The IRS taxes this interest at your marginal rate. If you’re in the 24% bracket, your money market interest is taxed at 24%. Unlike long-term capital gains or qualified dividends, which get preferential rates, this interest is taxed at whatever bracket your top dollar of income falls into.
Most states add their own income tax on top. Top marginal state rates currently run from 2.5% in states like Arizona and North Dakota up to 13.3% in California, though a handful of states have no income tax at all. Some local jurisdictions add another layer. The combined federal and state bite can meaningfully reduce what you actually keep from the account’s advertised yield.
Money Market Mutual Funds
Money market funds held through a brokerage work a little differently, even though the end result feels similar. When you invest in a money market fund, you’re buying shares in a pool of short-term debt. The income the fund earns is passed through to you as dividends, not interest. The IRS instructions for Form 1099-DIV specifically include “dividends from money market funds” as reportable ordinary dividends.3Internal Revenue Service. Instructions for Form 1099-DIV
The word “dividend” here can be misleading. These are ordinary dividends, not qualified dividends. Qualified dividends from stocks held long enough get taxed at the lower capital gains rates of 0%, 15%, or 20%. Money market fund dividends don’t qualify for that treatment because the fund’s underlying holdings are short-term debt, not long-term corporate stock. You pay your regular marginal rate on every distribution, the same as you would on bank interest.
When Some of the Income Escapes Tax
A few situations let you avoid part or all of the tax bill.
Tax-Exempt Municipal Money Market Funds
Some money market funds invest exclusively in debt issued by state and local governments. Interest earned on those municipal bonds is generally excluded from federal gross income.4Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds For investors in higher brackets, this exclusion can make a tax-exempt fund more valuable after taxes than a higher-yielding taxable fund.
The state tax picture depends on where you live and where the bonds were issued. If a tax-exempt fund holds bonds from your own state, the income is often exempt from your state income tax as well. Bonds from other states usually don’t get that treatment, so a national municipal money market fund may deliver only a partial state exemption. Your fund company will typically publish a state-by-state breakdown each year.
U.S. Treasury Holdings Inside a Taxable Fund or Account
Many ordinary taxable money market funds and bank money market accounts hold U.S. Treasury bills or other federal government obligations. Under federal law, interest earned on those obligations is exempt from state and local income taxes.5Office of the Law Revision Counsel. 31 USC 3124 – Exemption from Taxation You still owe federal tax on the income, but the state savings can be meaningful in a high-tax state.
Most fund companies publish an annual statement showing the percentage of income that came from U.S. government securities. You multiply that percentage by your total distribution to calculate the state-exempt portion. A few states, including California, Connecticut, and New York, require the fund to hold at least 50% of its assets in government securities before any of the income qualifies. Most other states have no minimum threshold. If your fund held a meaningful share of Treasuries during the year, check whether you’re entitled to subtract that portion on your state return.
Retirement Accounts
Everything above assumes the account sits in a regular taxable bank or brokerage account. The rules change completely inside a traditional IRA, Roth IRA, or 401(k). In a traditional IRA or 401(k), interest and dividends earned inside the account aren’t taxed in the year you earn them; you pay income tax later, when you take distributions in retirement. In a Roth IRA, you’ve already paid tax on the money going in, so qualified distributions come out entirely tax-free, including any growth from money market holdings. You won’t receive a 1099-INT or 1099-DIV for earnings inside a retirement account, and you don’t report them annually. The trade-off is reduced access, since early withdrawals typically trigger both income tax and a 10% penalty.
The 3.8% Surtax for High Earners
If your modified adjusted gross income exceeds certain thresholds, you may owe an additional 3.8% net investment income tax on top of your regular rates. The IRS counts interest and dividends from money market vehicles as net investment income.6Internal Revenue Service. Net Investment Income Tax
The surtax kicks in when your modified AGI exceeds:
- $200,000 for single filers or heads of household
- $250,000 for married couples filing jointly
- $125,000 for married filing separately
The 3.8% tax applies to whichever is smaller: your total net investment income, or the amount by which your modified AGI exceeds the threshold.7Internal Revenue Service. Topic No. 559, Net Investment Income Tax These thresholds are not indexed for inflation, so more taxpayers cross into surtax territory each year. For someone in the 37% bracket who also owes the surtax, money market earnings face an effective federal rate of 40.8% before state taxes enter the picture.
What You’ll Receive at Tax Time
Your bank or brokerage reports money market earnings to both you and the IRS. Which form you receive depends on the type of account.
- Form 1099-INT for bank money market accounts, issued when interest paid reaches at least $10 during the year.8Internal Revenue Service. About Form 1099-INT, Interest Income
- Form 1099-DIV for money market mutual funds, issued when dividend distributions reach at least $10. Tax-exempt dividends from municipal funds appear separately on this form.3Internal Revenue Service. Instructions for Form 1099-DIV
- Form 1099-OID, issued occasionally when a money market instrument involves original issue discount of $10 or more.9Internal Revenue Service. About Form 1099-OID, Original Issue Discount
These forms are generally available by January 31 following the tax year. If your combined taxable interest or ordinary dividends exceed $1,500 for the year, you’ll also need to file Schedule B with your Form 1040, listing each payer and the amount received.10Internal Revenue Service. 2025 Instructions for Schedule B (Form 1040)
Here’s where people get tripped up. The $10 threshold only controls whether the institution has to send you a form. You owe tax on all interest and dividend income regardless of whether you receive a 1099. If your bank paid you $7 in interest and didn’t issue a form, that $7 still belongs on your tax return.11Internal Revenue Service. 1099-INT Interest Income The IRS already knows about the payment from the bank’s records, and a mismatch is one of the easiest things for their automated systems to flag.
Backup Withholding
When you open a money market account, the institution asks for your taxpayer identification number on Form W-9. If you skip that step, provide an incorrect number, or the IRS notifies the institution that you’ve been underreporting income, the institution must withhold 24% of your earnings and send it directly to the IRS.12Internal Revenue Service. Publication 15 (2026), Employer’s Tax Guide
Backup withholding isn’t an extra tax. It’s a forced prepayment of tax you already owe, and you claim credit for the withheld amount on your return. Still, having 24% skimmed off every payment is a cash flow hit that’s entirely avoidable. Fill out your W-9 correctly when opening the account, and report all interest and dividend income on your returns each year.13Internal Revenue Service. Form W-9 Request for Taxpayer Identification Number and Certification