Is Interest Income Taxable? Rates, Exceptions, and Reporting

Yes, interest income is taxable in almost every case. The IRS treats interest from bank accounts, CDs, corporate bonds, and most other sources as ordinary income, meaning it’s added to your wages and taxed at your regular federal rate, which ranges from 10% to 37% for 2026.¹ A short list of exceptions applies, most notably interest from municipal bonds and, in limited situations, U.S. savings bonds used to pay for education.

What Counts as Taxable Interest

The IRS considers interest from ordinary financial products to be taxable income. That includes:

Interest credited to savings and checking accounts
Interest earned on certificates of deposit
Money market account interest
Periodic interest payments from corporate bonds
Interest on insurance dividends left on deposit with a private insurer, taxed in the year credited if you can withdraw it without penalty²

One narrow carve-out: interest on insurance dividends left on deposit with the U.S. Department of Veterans Affairs is not taxable.³

Interest the government pays you also counts. If the IRS or a state tax agency adds interest to a delayed refund, that interest is taxable in the year you receive it.³

When Interest Is Considered Received

Interest is taxable the year it’s credited to your account or made available to you, not the year you spend or transfer it. This is called constructive receipt.² A $200 interest posting on December 31 belongs on that year’s return even if the money sits untouched for months. The rule comes from federal tax law, which includes gross income in the year it’s actually or constructively received.⁴

What Rate You’ll Pay

Interest doesn’t qualify for the lower rates that apply to long-term capital gains or qualified dividends. It’s taxed at your ordinary bracket, layered on top of your wages and other income. For 2026, single filers pay 10% on the first $12,400 of taxable income and reach the 37% top rate above $640,600.¹

The 3.8% Net Investment Income Tax

Higher earners owe an additional 3.8% on investment income, including taxable interest. The Net Investment Income Tax applies to the lesser of your net investment income or the amount your modified adjusted gross income exceeds these thresholds:⁵

$200,000 for single or head of household filers
$250,000 for married filing jointly
$125,000 for married filing separately

These thresholds are not indexed for inflation and have been the same since the NIIT took effect in 2013.

Interest That Escapes Some or All Tax

Municipal Bonds

Interest from bonds issued by states, cities, and counties is generally exempt from federal income tax. If you buy a bond issued outside your home state, the interest can still be subject to your state’s income tax. And interest from certain private activity municipal bonds, which fund projects benefiting private entities, can count as a preference item under the federal Alternative Minimum Tax. Check whether a specific bond triggers AMT before treating it as fully tax-free.

U.S. Treasury Securities

Interest on Treasury bills, notes, and bonds is taxable federally but exempt from state and local income taxes. Federal law bars states from taxing interest on obligations of the U.S. government.⁶ In a high-tax state, this can meaningfully lower your total bill.

Series EE and Series I Savings Bonds

Holders of Series EE or Series I savings bonds pick one of two reporting methods: report the interest each year as it accrues, or defer reporting until the bond is redeemed, transferred, or reaches final maturity. Most individuals defer, which lets the interest compound without annual tax. If you switch from deferral to annual reporting, no IRS permission is needed, but the change applies to every savings bond registered under your Social Security number.⁷

You may be able to exclude the interest from federal tax entirely if you use the proceeds for qualified higher education expenses in the same year.⁸ To qualify:

The bond must have been issued after December 31, 1989
The bond owner must have been at least 24 years old before the issue date
Married taxpayers must file jointly

Qualified expenses cover tuition and fees at an eligible institution for you, your spouse, or a dependent. Room and board don’t count. Contributions to a 529 plan or Coverdell education savings account do qualify.⁸ The exclusion phases out at higher incomes. For 2026, the phase-out begins at a modified adjusted gross income of $101,800 for single filers ($152,650 for joint filers) and disappears entirely at $116,800 ($182,650 joint).

How Interest Gets Reported

Form 1099-INT

Banks and other payers send Form 1099-INT whenever they pay you $10 or more in interest during the year.⁹ The form breaks out taxable interest, tax-exempt interest, and any federal tax withheld. If you earned less than $10 or never received the form, you still have to report the income.³

Schedule B

You must file Schedule B with your Form 1040 if your total taxable interest or ordinary dividends exceed $1,500 for the year.¹⁰ It lists each payer and the amount received. Schedule B is also required if you have a financial interest in or signature authority over a foreign financial account, whatever the interest amount.

Foreign Accounts

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) with FinCEN.¹¹ The FBAR is filed electronically through FinCEN’s BSA E-Filing System, not with your tax return. A non-willful violation can bring a civil penalty of up to $10,000. A willful violation carries a penalty equal to the greater of $100,000 or 50% of the account balance at the time of the violation, and criminal prosecution is possible.¹²

What Happens If You Don’t Report It

Omitting interest that appears on a 1099 is one of the things the IRS flags as potential negligence. The agency can add a 20% accuracy-related penalty on the underpaid tax, plus interest running from the original due date until the balance is paid.¹³

A financial institution may also be required to withhold 24% of your interest payments and send it directly to the IRS. This backup withholding applies when:¹⁴

You didn’t give the payer a correct Taxpayer Identification Number
The IRS told the payer you previously underreported interest or dividends
You didn’t certify that you’re not subject to backup withholding

Backup withholding isn’t an added tax. It’s credited against what you owe when you file, and you get any excess back as a refund.

Two Adjustments Worth Knowing

Accrued Interest You Paid a Bond Seller

Buy a bond between interest payment dates and you typically pay the seller for interest that built up since the last coupon. When the next payment arrives, part of it is really a return of what you already paid. You can subtract that amount on Schedule B by labeling it “Accrued Interest,” so you’re not taxed on money that was never truly your income.¹⁵

Early Withdrawal Penalty on a CD

If you cash out a CD before maturity and the bank charges a penalty, you can deduct that penalty as an adjustment to income on Schedule 1 of your Form 1040. The deduction is available whether or not you itemize, and you can take the full penalty even in the odd case where it exceeds the interest earned.

Two Situations People Often Miss

Original Issue Discount

Original issue discount is interest that arises when a bond is issued for less than its face value. The gap between the discounted price and the amount paid at maturity is treated as interest, spread over the life of the instrument. Zero-coupon bonds are the classic example. Even though you receive no cash until maturity, you must report a portion each year, and if the OID for the year is $10 or more, the issuer sends Form 1099-OID showing the amount.¹⁶¹⁷

Family Loans at Low or No Interest

If you lend money to a friend or relative and charge little or no interest, the IRS may treat the arrangement as if fair-market interest were charged. The Applicable Federal Rate, published monthly, sets the floor. Interest calculated at that rate but never actually paid is called imputed interest, and the lender may owe tax on it.

Gift loans between individuals are exempt from the imputed interest rules as long as the total outstanding balance between the two people stays at or below $10,000. That exception disappears if the borrowed money is used to buy income-producing assets like stocks or rental property.¹⁸

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses
3
Internal Revenue Service. Topic No. 403, Interest Received
4
Office of the Law Revision Counsel. 26 U.S. Code 451 – General Rule for Taxable Year of Inclusion
5
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
6
Office of the Law Revision Counsel. 31 U.S. Code 3124 – Exemption From Taxation
7
TreasuryDirect. Tax Information for EE and I Bonds
8
Office of the Law Revision Counsel. 26 U.S. Code 135 – Income From United States Savings Bonds Used to Pay Higher Education Tuition and Fees
9
Internal Revenue Service. About Form 1099-INT, Interest Income
10
Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends
11
FinCEN. Report Foreign Bank and Financial Accounts
12
Office of the Law Revision Counsel. 31 USC 5321 – Civil Penalties
13
Internal Revenue Service. Accuracy-Related Penalty
14
Internal Revenue Service. Backup Withholding
15
Internal Revenue Service. Instructions for Schedule B (Form 1040) (2025)
16
Internal Revenue Service. Publication 1212 (12/2025), Guide to Original Issue Discount (OID)
17
Internal Revenue Service. About Form 1099-OID, Original Issue Discount
18
Office of the Law Revision Counsel. 26 U.S. Code 7872 – Treatment of Loans With Below-Market Interest Rates