Yes, you pay taxes on bank interest. The IRS treats interest from savings accounts, checking accounts, CDs, and money market accounts as ordinary income, taxed at the same marginal rate as your wages.1Internal Revenue Service. Federal Income Tax Rates and Brackets Most states tax it too. There is no minimum amount that escapes tax, and whether or not your bank sends you a form, the interest belongs on your return.
How the Tax Works
Bank interest is ordinary income. If your other income puts you in the 22% federal bracket, each dollar of interest is taxed at 22%. There is no preferential rate the way long-term capital gains or qualified dividends get one.
Interest becomes taxable the moment it is credited to your account, not when you withdraw it. A savings account that compounds monthly generates taxable interest every month, even if you never touch the balance.2Internal Revenue Service. Topic No. 403, Interest Received The same rule applies to CDs. A five-year CD that pays all its interest at maturity still produces taxable income each year as the interest accrues; you cannot wait and report the whole lump in the year you cash out.
What Counts as Taxable Interest
The category is broader than most people realize. All of the following produce taxable interest income:
- Savings and checking account interest.
- CD interest, accruing each year even on multi-year CDs you have not redeemed.
- Money market account interest and money market fund distributions.
- Corporate bond interest.
- Credit union share account payments. These are called “dividends,” but the IRS classifies them as interest and taxes them that way.3Internal Revenue Service. Interest, Dividends, Other Types of Income
- Interest the IRS paid you on a delayed refund. That amount is taxable the following year.2Internal Revenue Service. Topic No. 403, Interest Received
The 1099-INT and the $10 Myth
Banks and credit unions report your interest to you and to the IRS on Form 1099-INT. They are only required to send the form when they have paid you $10 or more during the year.4Internal Revenue Service. About Form 1099-INT, Interest Income Box 1 shows your total taxable interest.
The $10 figure is a reporting threshold for the bank, not a tax threshold for you. If you earned $6 at one bank and $4 at another and no 1099-INT ever shows up, you still owe tax on that $10.2Internal Revenue Service. Topic No. 403, Interest Received Check your December statements for the year-end interest total and report it the same way you would report an amount from a form.
Where It Goes on Your Return
Taxable interest from Box 1 goes on Line 2b of Form 1040. For most people with modest interest from one or two accounts, that single line is the entire exercise.
If your total taxable interest for the year is more than $1,500, you must attach Schedule B and list each payer with the amount received. Schedule B is also required if you got interest as a nominee (meaning the 1099-INT came in your name but part of the interest belongs to someone else), or if you are claiming the savings bond education exclusion.5Internal Revenue Service. 2025 Instructions for Schedule B (Form 1040)
State Tax on Bank Interest
Most states with an income tax treat bank interest as ordinary income at the state’s marginal rate, and the amount flows through from your federal return to your state return. About eight states have no individual income tax, so residents there only owe federal tax on their interest. There is no general state-level exemption for ordinary bank interest.
Interest That Gets Favorable Treatment
A few narrow categories of interest are treated differently. None of them cover a standard bank account, but it is worth knowing the lines in case you hold other instruments.
Municipal Bond Interest
Interest from bonds issued by state and local governments is generally exempt from federal income tax, and if the issuer is in your own state, often from state tax as well. You still report it on Line 2a of Form 1040 so the IRS can confirm its status, but no federal tax is due.6Internal Revenue Service. Tax-Exempt Bonds
Treasury Securities
Interest from Treasury bills, notes, and bonds is fully taxable federally, but federal law exempts it from state and local income tax. In a high-tax state, that makes Treasuries slightly more tax-efficient than an equivalent-yield bank CD.
Savings Bond Education Exclusion
Interest on Series EE and Series I savings bonds issued after 1989 can be excluded from federal tax if you use the proceeds for qualified higher education expenses for yourself, your spouse, or a dependent.7TreasuryDirect. Using Bonds for Higher Education For 2026, the exclusion phases out between $101,800 and $116,800 of modified adjusted gross income for single filers and between $152,650 and $182,650 for joint filers.8Internal Revenue Service. Rev. Proc. 2025-32 You claim the exclusion on Form 8815.9Internal Revenue Service. About Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
An Extra 3.8% for High Earners
If your modified adjusted gross income is above $200,000 (single) or $250,000 (married filing jointly), bank interest is also subject to the 3.8% Net Investment Income Tax on the portion of your investment income above those thresholds.10Internal Revenue Service. Net Investment Income Tax The thresholds are not indexed for inflation, so more taxpayers cross them each year. If you are near those numbers, your effective rate on bank interest is your marginal bracket plus 3.8%.
What Happens If You Don’t Report It
The IRS gets a copy of every 1099-INT your bank sends you, and its automated matching system flags returns that leave interest out. The accuracy-related penalty for underreporting due to negligence is 20% of the additional tax owed.11Internal Revenue Service. Accuracy-Related Penalty On top of that, the failure-to-pay penalty runs 0.5% of the unpaid tax per month, up to 25%.12Internal Revenue Service. Failure to Pay Penalty Interest also accrues on the unpaid balance. For the first quarter of 2026, the IRS rate is 7% annually, compounded daily.13Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
On a few hundred dollars of forgotten interest the dollars are small, but the notice process is not pleasant. Reporting everything, including amounts below the $10 threshold that never produced a form, avoids all of it.
Situations That Can Change What You Owe
Early CD Withdrawal Penalty
If you broke a CD early and paid a penalty, you can deduct that penalty from your gross income. The amount usually appears in Box 2 of your 1099-INT. It is an above-the-line deduction on Schedule 1, so you get it even if you take the standard deduction.
Backup Withholding
If you did not give your bank a correct taxpayer identification number, or the IRS has notified the bank that you underreported interest or dividends in the past, the bank must withhold 24% of your interest and send it to the IRS.14Internal Revenue Service. Backup Withholding This is not an extra tax. It is a prepayment, and you claim credit for it on your return.
Estimated Tax Payments
If your interest income is large enough that your paycheck withholding will not cover the tax, you may need to make quarterly estimated payments. The general trigger is expecting to owe $1,000 or more at filing time after accounting for withholding and credits.15Internal Revenue Service. Estimated Taxes This most often matters for retirees living on savings and for anyone holding a large high-yield balance without wage withholding to lean on. Payments are due in April, June, September, and January; missing them creates an underpayment penalty even if you pay in full when you file.
Interest in Foreign Accounts
Interest earned in a foreign bank account is taxable on your U.S. return the same way domestic interest is. Foreign accounts also carry separate reporting rules with heavy penalties: an FBAR filing with FinCEN if the combined value of your foreign accounts exceeded $10,000 at any point in the year,16FinCEN.gov. Report Foreign Bank and Financial Accounts and potentially Form 8938 with your tax return at higher thresholds.17Internal Revenue Service. Instructions for Form 8938 If you have foreign accounts, those filings are separate obligations from paying tax on the interest itself.