Interest income is taxed at your ordinary federal income tax rate, which for 2026 ranges from 10% to 37% depending on your total taxable income. So the question of what interest income is taxed at has no single answer: every dollar of interest gets stacked on top of your wages and other ordinary income, and whatever bracket that pushes you into is the rate you pay on it. High earners can owe an additional 3.8% on top, bringing the top federal rate on interest to 40.8%. Most states then tax it again.
The 2026 Federal Brackets That Apply to Interest
Interest does not get its own rate schedule. It is pooled with your salary, self-employment income, and other ordinary income, and the combined figure determines which brackets apply.1Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed For tax year 2026, the seven ordinary-income brackets are:
- 10% up to $12,400 for single filers ($24,800 married filing jointly)
- 12% from $12,401 to $50,400 ($24,801 to $100,800 joint)
- 22% from $50,401 to $105,700 ($100,801 to $211,400 joint)
- 24% from $105,701 to $201,775 ($211,401 to $403,550 joint)
- 32% from $201,776 to $256,225 ($403,551 to $512,450 joint)
- 35% from $256,226 to $640,600 ($512,451 to $768,700 joint)
- 37% over $640,600 ($768,700 joint)
Someone with modest overall income might pay 10% or 12% on interest earnings, while someone in the top bracket pays 37%.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
This is a much heavier treatment than long-term capital gains, which are taxed at preferential rates of 0%, 15%, or 20%.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses Interest earns no such discount. At the federal level, it is often the most heavily taxed form of investment return.
The 3.8% Surcharge on Higher Earners
On top of the ordinary rate, an additional 3.8% Net Investment Income Tax applies once your modified adjusted gross income crosses $200,000 for single filers or $250,000 for joint filers.4Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Interest counts as net investment income, so it feeds directly into this calculation. The thresholds are set by statute and are not adjusted for inflation, which pulls more taxpayers across them each year.
The tax equals 3.8% of the smaller of two figures: your total net investment income, or the amount by which your modified AGI exceeds the threshold.4Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax For a taxpayer in the top 37% bracket, the combined federal rate on interest reaches 40.8%.
Interest That Escapes Federal Tax
Not all interest is federally taxable. The main exemption is municipal bond interest. When state and local governments issue debt to fund schools, roads, utilities, and similar projects, the interest they pay is generally excluded from federal gross income.5Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds You still report tax-exempt interest on your return, but no federal tax comes out of it.
One exception. Interest from certain private activity bonds, which are municipal bonds used to finance projects for private entities rather than purely public ones, can be reached by the Alternative Minimum Tax even though it is excluded from regular income tax. If you hold these bonds, check whether AMT applies to your situation.
U.S. Treasury securities work in the opposite direction. Interest on Treasury bills, notes, and bonds is fully taxable federally but exempt from state and local income taxes.6TreasuryDirect. Tax Forms and Tax Withholding That makes them especially useful for investors in high-tax states.
Series EE and Series I U.S. savings bonds follow the Treasury pattern: federally taxable, exempt from state and local tax. You can choose to report the interest each year as it accrues, or defer all of it until you redeem the bond or it reaches final maturity. Most holders defer, which produces a large slug of taxable interest in the redemption year.7Internal Revenue Service. Savings Bonds 1 An education exclusion can eliminate the federal tax on savings bond interest entirely if the proceeds pay qualified higher education expenses. For 2026, the exclusion phases out between $101,800 and $116,800 of modified AGI for single filers ($152,650 to $182,650 joint). The bond must have been issued after 1989, you must have been at least 24 when you bought it, and the expenses must be for you, your spouse, or a dependent.
State Taxes on Interest
Federal is only part of the total. Most states with an income tax treat interest the same way the federal government does, taxing it as ordinary income at regular state rates. State rates run from 0% in states with no income tax to above 13% in the highest-tax states. Your effective rate depends on where you live and your total state taxable income.
Two levers to keep in mind. Treasury interest is exempt from state and local tax everywhere, and interest from municipal bonds issued by your home state is typically exempt from that state’s income tax as well. The mix of bonds you hold can meaningfully change your combined federal-and-state rate on interest.
What Actually Counts as Interest — and Who Tells the IRS
The rate is easy to state. What trips people up is which payments the IRS treats as interest in the first place.
Everyday accounts are the obvious sources: savings, checking, money market accounts, and certificates of deposit. Corporate bond payments count too. So do insurance policy dividends left on deposit with an insurer, which earn taxable interest while the insurer holds them.8Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses If the IRS pays you interest on a delayed refund, that interest is taxable in the year you receive it.9Internal Revenue Service. 13.9 Million Americans to Receive IRS Tax Refund Interest
Any payer that sends you $10 or more in interest for the year must issue a Form 1099-INT by January 31, with a copy going to the IRS.10Internal Revenue Service. Topic No. 403, Interest Received You are required to report interest even if no 1099-INT arrives. If your taxable interest for the year exceeds $1,500, you must complete Schedule B and list each payer.11Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends The IRS matches 1099-INT data against returns automatically, so unreported interest tends to generate a notice quickly.12Internal Revenue Service. A Guide to Information Returns Underreporting can bring a 20% accuracy-related penalty on the underpaid tax.13Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
Original Issue Discount
When a bond is issued for less than its face value, such as a zero-coupon bond, the difference between what you paid and what you receive at maturity is original issue discount (OID). Even without cash payments along the way, you generally must report a slice of that OID as interest income each year you hold the bond. A narrow exception treats OID as zero when the total discount is less than one-quarter of one percent of face value multiplied by the number of full years to maturity.14Office of the Law Revision Counsel. 26 USC 1273 – Determination of Amount of Original Issue Discount
Imputed Interest on Below-Market Loans
Lend money to a friend or relative at little or no interest and the IRS may treat a portion of the loan as producing taxable interest anyway. The agency publishes Applicable Federal Rates each month for short-term (up to three years), mid-term (three to nine years), and long-term (over nine years) loans.15Office of the Law Revision Counsel. 26 USC 1274 – Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property Charge below the applicable AFR and the gap is imputed interest, taxed to the lender even though no cash changed hands. The rule generally applies to loans above $10,000.
Foreign Accounts
Interest from a bank account in another country is taxed just like domestic interest, at ordinary rates, because the U.S. taxes worldwide income. Holding foreign accounts also brings separate disclosure obligations under FBAR and, at higher thresholds, FATCA Form 8938, both of which are filing requirements rather than added taxes on the interest itself.16Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR)17Internal Revenue Service. Summary of FATCA Reporting for U.S. Taxpayers