Yes, you do 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. A handful of interest types get favorable treatment, but the default rule is simple: if your money earned interest, you owe tax on it.
How the Tax Works
Bank interest is ordinary income, which means it lands in whatever bracket your total income puts you in. If your wages already have you in the 22% bracket, each dollar of interest is taxed at 22%. There is no reduced rate the way there is for long-term capital gains or qualified dividends.1Internal Revenue Service. Federal Income Tax Rates and Brackets
A detail that surprises people: interest becomes taxable the moment it is credited to your account, not when you withdraw it. A savings account that compounds monthly generates taxable income every month, even if you never touch the balance.2Internal Revenue Service. Topic No. 403, Interest Received CDs work the same way. A five-year CD that rolls up interest until maturity still produces taxable income each year as the interest accrues. You cannot defer it to the year you cash out.
What Counts as Taxable Interest
The list runs wider than most people think:
- Interest credited to savings and checking accounts.
- Interest accrued on CDs, including multi-year CDs you haven’t redeemed.
- Bank money market accounts and money market fund distributions.
- Interest from corporate bonds.
- Credit union share account payments. These are labeled “dividends” by the credit union but classified as interest by the IRS.3Internal Revenue Service. Interest, Dividends, Other Types of Income
- Interest the IRS pays you on a delayed tax refund. It’s taxable the year you receive it.2Internal Revenue Service. Topic No. 403, Interest Received
The 1099-INT and the $10 Threshold
Your bank or credit union reports interest to you and the IRS on Form 1099-INT. The institution is required to issue this form when it pays you $10 or more in interest for the year.4Internal Revenue Service. About Form 1099-INT, Interest Income Box 1 shows your total taxable interest, and that’s the number you’ll use on your return.
The $10 threshold governs when the bank must send a form. It does not govern whether you owe tax. If you earned $6 across a couple of accounts and no 1099-INT arrived, that $6 is still taxable and belongs on your return.2Internal Revenue Service. Topic No. 403, Interest Received Your year-end account statements will show the interest paid; use those figures.
If a 1099-INT shows the wrong amount, contact your bank first for a corrected form. If the corrected version doesn’t arrive by the end of February, you can call the IRS at 800-829-1040 for help. Filing before the correction arrives is possible using Form 4852 to estimate the right number, but if the eventual corrected form disagrees with what you filed, you’ll need to amend on Form 1040-X.5Internal Revenue Service. What to Do When a W-2 or Form 1099 Is Missing or Incorrect
How to Report It on Your Return
Taxable interest from Box 1 of your 1099-INT goes on Line 2b of Form 1040. For most filers with a few hundred dollars of interest from one or two banks, that single line is the whole job.
Schedule B enters the picture once your total taxable interest for the year passes $1,500. Schedule B has you list each payer and the amount received, and the total then flows to Line 2b. You also need Schedule B if you received interest as a nominee (the 1099-INT is in your name but part of the interest belongs to someone else) or if you’re claiming the education exclusion for savings bond interest.6Internal Revenue Service. 2025 Instructions for Schedule B (Form 1040)
Interest That Gets a Break
A few categories don’t follow the default rule. If any of these apply to you, the tax picture changes.
Municipal Bond Interest
Interest from bonds issued by state and local governments is generally exempt from federal income tax. If the bond was issued by your own state, the interest is often exempt from state tax too. You still report it on Line 2a of Form 1040 so the IRS can verify the tax-exempt status, but no federal tax is owed on it.7Internal Revenue Service. Tax-Exempt Bonds
U.S. Treasury Securities
Interest from Treasury bills, notes, and bonds is fully taxable at the federal level, but federal law exempts it from state and local income taxes. That makes Treasuries slightly more tax-efficient than bank CDs for residents of high-tax states. Most tax software handles this automatically, but it’s worth confirming on your state return.
Savings Bond Interest Used for Education
Interest on Series EE and Series I savings bonds issued after 1989 can be excluded from federal tax when you use the proceeds for qualified higher education expenses for yourself, your spouse, or a dependent.8TreasuryDirect. Using Bonds for Higher Education The exclusion phases out at higher incomes. For 2026, the benefit begins phasing out when modified adjusted gross income exceeds $101,800 ($152,650 for joint filers) and disappears entirely at $116,800 ($182,650 for joint filers).9Internal Revenue Service. Rev. Proc. 2025-32 You claim it on Form 8815 attached to your return.10Internal Revenue Service. About Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
These exemptions don’t extend to ordinary bank accounts. Regular savings, checking, CDs, and money market accounts at a bank or credit union get no federal exemption regardless of what you do with the money.
State Taxes on Bank Interest
Most states with an income tax treat bank interest as ordinary income at the state’s marginal rate. State rates range from 0% in states with no income tax up to roughly 13% or more in the highest-tax states. About eight states have no individual income tax at all, meaning residents there only owe federal tax on their bank interest. In most other states, the amount on your federal return flows through to your state return without any special exclusion for ordinary bank interest.
The 3.8% Net Investment Income Tax
Higher earners owe an extra 3.8% on net investment income, which includes bank interest. The surtax applies when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly, and it hits only the investment income above those thresholds.11Internal Revenue Service. Net Investment Income Tax The thresholds are not indexed for inflation, so more filers cross them each year. If you’re near those numbers, your effective rate on bank interest is your marginal rate plus 3.8%.
Deducting a CD Early Withdrawal Penalty
If you broke a CD before maturity and paid a penalty, you can deduct that penalty from your gross income. The amount usually shows up in Box 2 of your 1099-INT. This is an above-the-line deduction on Schedule 1, so you can take it even if you don’t itemize, and it reduces adjusted gross income directly.
What Happens If You Skip Reporting It
The IRS gets a copy of every 1099-INT your bank sends you, and its automated matching system flags returns that leave interest off. The accuracy-related penalty for underreporting due to negligence is 20% of the additional tax owed.12Internal Revenue Service. Accuracy-Related Penalty Failure to pay adds 0.5% of the unpaid tax per month, up to 25%.13Internal Revenue Service. Failure to Pay Penalty Interest accrues on top; for the first quarter of 2026, the IRS charges 7% annual interest, compounded daily.14Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
On a small amount of interest, these penalties can look minor, but they compound and the notice process is unpleasant. The simpler move is to report everything, including the small amounts that never generated a 1099-INT.
When You May Owe Estimated Taxes
If you earn substantial interest and don’t have enough tax withheld from wages or other sources to cover it, you may need to make quarterly estimated payments. The general rule: you owe estimated tax if you expect to owe $1,000 or more when you file, after withholding and credits.15Internal Revenue Service. Estimated Taxes This most often catches retirees living on savings and investment income, or anyone sitting on a large high-yield balance without matching withholding elsewhere. Estimated payments are due in April, June, September, and January. Skipping them triggers an underpayment penalty even if you pay the full balance at filing.