Do I Have to Pay Tax on Interest From Savings?
Understand how interest from your savings is taxed and what you need to know for accurate income reporting to the IRS.
Interest earned on savings accounts and other interest-bearing investments is generally subject to taxation. The Internal Revenue Service (IRS) considers this income taxable, meaning it must be reported on your federal income tax return. This guide clarifies the tax implications of interest earned on savings and outlines the necessary steps for reporting it accurately.
General Taxability of Interest Income
Most interest income is taxable at the federal level, regardless of its source. This includes earnings from regular savings accounts, money market accounts, Certificates of Deposit (CDs), and corporate bonds.
Interest from U.S. Treasury bills, notes, and bonds is subject to federal income tax. However, these investments are exempt from state and local income taxes.
Understanding Your Tax Documents
Financial institutions, including banks, credit unions, and brokerage firms, are generally required to report interest payments to you and the IRS. If you earn $10 or more in interest during a calendar year, you will typically receive Form 1099-INT, Interest Income. This form provides a summary of the interest you received and is essential for accurate tax reporting.
On Form 1099-INT, Box 1 shows the total taxable interest you received. Box 3 reports interest earned on U.S. Savings Bonds and Treasury obligations, which is federally taxable but generally exempt from state and local taxes. Box 8 indicates tax-exempt interest, such as that from municipal bonds, which, while not taxed, still needs to be reported for informational purposes.
How to Report Interest Income
Reporting interest income on your tax return typically begins with the information provided on Form 1099-INT. The amount listed in Box 1, representing your taxable interest, is generally entered directly onto the appropriate line for “Interest” on your Form 1040, U.S. Individual Income Tax Return. This direct entry is suitable for most taxpayers with modest interest earnings.
If your total taxable interest income exceeds $1,500, you are generally required to file Schedule B, Interest and Ordinary Dividends, with your Form 1040. On Schedule B, you will list each payer and the amount of interest received from them. The total interest calculated on Schedule B then flows to your Form 1040.
Tax preparation software and tax professionals can streamline this process by guiding you through entering the data from your 1099-INT forms. Even if your interest income is below the Schedule B threshold, all taxable interest must still be reported on your Form 1040.
Specific Scenarios for Interest Income
Certain types of interest income have unique tax treatments. Interest from municipal bonds, for example, is generally exempt from federal income tax. If the municipal bond is issued by a government entity within your state of residence, the interest may also be exempt from state and local taxes.
Even if a financial institution does not issue a Form 1099-INT because the interest earned is less than the $10 threshold, the income remains legally taxable. Taxpayers are still responsible for tracking and reporting these smaller amounts, often by reviewing bank statements. Interest income from jointly held accounts is typically attributed equally to each joint owner for tax purposes, though specific agreements can alter this distribution.