How much tax you pay on interest income depends on your total taxable income: the IRS taxes interest at the same ordinary rates it uses for wages, from 10% up to 37% in 2026.1Internal Revenue Service. Federal Income Tax Rates and Brackets High earners can owe an extra 3.8% surcharge on top of that, and most states pile on their own income tax. A handful of interest sources escape some or all of these taxes, which is where planning starts to matter.
Federal Rates on Interest Income
Interest is treated as ordinary income under the Internal Revenue Code and gets stacked on top of your wages, business income, and short-term gains.2Office of the Law Revision Counsel. 26 U.S. Code 61 – Gross Income Defined The seven federal brackets for 2026 are:1Internal Revenue Service. Federal Income Tax Rates and Brackets
- 10% up to $11,925 single / $23,850 married filing jointly
- 12% from $11,926 to $48,475 / $23,851 to $96,950
- 22% from $48,476 to $103,350 / $96,951 to $206,700
- 24% from $103,351 to $197,300 / $206,701 to $394,600
- 32% from $197,301 to $250,525 / $394,601 to $501,050
- 35% from $250,526 to $626,350 / $501,051 to $751,600
- 37% above $626,350 / above $751,600
The brackets are marginal. If you’re single with $48,000 in wages and $2,000 in savings interest, only the $1,525 of interest that spills past $48,475 is taxed at 22%; the rest stays at 12%. Your whole income doesn’t jump a bracket just because part of it does.
Interest is treated worse than most other investment income. Qualified dividends and long-term capital gains get preferential rates of 0%, 15%, or 20% for almost everyone. Interest gets no equivalent break. A single filer in the 32% bracket loses 32 cents of every extra interest dollar to federal tax, while the same dollar taken as a qualified dividend might be taxed at 15%.
The 3.8% Surcharge for Higher Earners
If your modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly, the Net Investment Income Tax adds 3.8% on top of your regular federal rate.3Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax It applies to the smaller of your net investment income or the amount by which your MAGI exceeds the threshold.4Internal Revenue Service. Topic No. 559, Net Investment Income Tax
A single filer with $220,000 in MAGI and $30,000 of interest owes the 3.8% surcharge on $20,000 (the excess over $200,000), not the full $30,000. That’s an added $760 on top of ordinary income tax.
Municipal bond interest is excluded from net investment income and doesn’t trigger the surcharge. Estates and trusts hit the NIIT threshold at just $16,000 of adjusted gross income in 2026, the same point where the top trust bracket begins. The tax is calculated on Form 8960.
State Tax on Interest
Most states tax interest at the same rates as wages. State income tax ranges from 0% in states with no income tax to over 13% at the top end. A resident of a high-tax state in the top federal bracket can see a combined marginal rate above 40% on ordinary interest.
One category is off-limits to the states. Interest on U.S. Treasury bills, notes, and bonds is exempt from all state and local income tax by federal statute.5Office of the Law Revision Counsel. 31 U.S. Code 3124 – Exemption From Taxation Treasury interest is still fully taxable federally, but the state break can meaningfully lift the after-tax yield versus a CD or corporate bond paying the same rate. If you hold Treasuries through a fund that also owns non-Treasury bonds, the fund company usually publishes the percentage of income attributable to U.S. government obligations so you can calculate the exempt portion on your state return.
Interest That Is Taxed Differently or Not at All
Municipal Bonds
Interest on bonds issued by state and local governments is generally excluded from federal income tax.6Office of the Law Revision Counsel. 26 U.S. Code 103 – Interest on State and Local Bonds Hold a bond issued by your own state, and you often skip state tax on that interest too. The exemption is most valuable to investors in the highest brackets, where the tax savings offset the typically lower yields.
Tax-free doesn’t mean off your return. Municipal interest appears in Box 8 of Form 1099-INT and must be reported, because it factors into modified AGI calculations that affect other pieces of your return, including how much of your Social Security is taxable.7Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID (01/2024) – Section: Box 8. Tax-Exempt Interest
Watch for private activity bonds. Municipal bonds that finance private projects such as certain hospitals, housing, or industrial facilities can produce interest that gets pulled back into income under the Alternative Minimum Tax. The 2026 AMT exemption is $90,100 for single filers and $140,200 for joint filers, phasing out beginning at $500,000 and $1,000,000.8Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 If you hold a municipal bond fund, check whether it holds private activity bonds. Many do.
U.S. Savings Bonds
Series EE and Series I savings bonds let you defer reporting interest until you redeem the bond or it matures, whichever comes first.9Internal Revenue Service. Topic No. 403, Interest Received You can elect to report annually as interest accrues, but most holders take the deferral, especially on I bonds held as inflation protection.
Use the proceeds for qualified higher education, and some or all of the interest can be excluded entirely under the Education Savings Bond Program. The bonds must have been issued after 1989, you must have been at least 24 when they were issued, and your modified AGI must fall under the annual limits. For 2025, the exclusion phases out between $99,500 and $114,500 for single filers and between $149,250 and $179,250 for joint filers.10Internal Revenue Service. Publication 970 (2025), Tax Benefits for Education The exclusion is claimed on Form 8815.11Internal Revenue Service. Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
Interest Inside Retirement and Health Accounts
Interest earned inside a traditional IRA, 401(k), or similar retirement account isn’t taxed the year it’s earned. It compounds without an annual tax drag, and you pay ordinary income tax on withdrawals instead.12Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts Roth IRAs and Roth 401(k)s go further: you contribute after-tax dollars, and qualified withdrawals, including all the accumulated interest, come out federally tax-free.
Health savings accounts get the fullest treatment available. Contributions are deductible, interest inside the account grows tax-free, and withdrawals for qualified medical expenses come out tax-free. Interest earned in a regular taxable brokerage or bank account gets none of these shelters and hits your return the same year.
How the Interest Gets Reported and Withheld
Any bank or financial institution that pays you $10 or more of interest during the year must send you a Form 1099-INT.13Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID (01/2024) You report the amount on Form 1040. If your total taxable interest for the year tops $1,500, you also file Schedule B.14Internal Revenue Service. 2025 Instructions for Schedule B (Form 1040)
Not getting a 1099-INT doesn’t erase the tax. Interest below $10 is still taxable and still belongs on your return. The IRS receives copies of every 1099-INT filed, and mismatches tend to produce automated notices.
If a payer doesn’t have a correct taxpayer identification number on file for you, it must withhold 24% of your interest and send it to the IRS as backup withholding.15Internal Revenue Service. Backup Withholding That isn’t an additional tax; it’s a credit against your tax liability, like wage withholding. Keeping your W-9 information current with every institution that pays you interest avoids tying up money you’ll only recover at filing.
Taxable interest reaches beyond bank accounts. It includes CDs, money market accounts, credit union share accounts, corporate bonds, loans you make to others (including through peer-to-peer platforms), seller-financed mortgages, and even the interest the IRS pays on late refunds.9Internal Revenue Service. Topic No. 403, Interest Received16Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
Foreign Accounts Add Reporting on Top of Tax
Interest earned in a foreign bank account is taxable in the United States just like domestic interest, but foreign accounts carry separate disclosure requirements that catch people by surprise. If the combined value of your foreign financial accounts exceeds $10,000 at any point during the year, you must file a Report of Foreign Bank and Financial Accounts (FBAR), FinCEN Form 114, whether or not the accounts produced any income.17Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR) A separate FATCA filing on Form 8938 kicks in at higher thresholds, starting at $50,000 on the last day of the year or $75,000 at any point for single U.S.-resident filers, with doubled amounts for joint filers and higher amounts still for Americans living abroad.18Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets? The two filings go to different agencies and have different rules, so both may apply. Penalties for missing them run to $10,000 or more per violation even when the failure isn’t willful.