Do You Pay Taxes on Bank Interest?
Clarify the tax implications of bank interest. Understand reporting necessities and the process for including this income on your tax return.
Many individuals earn interest from funds held in bank accounts, such as savings accounts or certificates of deposit. Understanding how this interest is treated for tax purposes is important for anyone managing their personal finances.
The Taxability of Bank Interest
Interest earned on funds held in bank accounts is subject to federal income tax. This includes interest from accounts such as savings accounts, checking accounts that pay interest, money market accounts, and certificates of deposit (CDs). The Internal Revenue Service (IRS) classifies this income as “ordinary income.”
As ordinary income, bank interest is subject to an individual’s regular marginal income tax rate. This means the interest is added to other forms of income, such as wages or salaries, and taxed at the rate applicable to that total income level. Even if the interest earned is a very small sum, it remains taxable income.
Banks calculate and pay interest on deposited funds based on agreed-upon rates and terms. While the frequency of interest payments can vary, the total amount of interest credited to an account within a calendar year is the figure that must be considered for tax purposes.
Reporting Requirements for Bank Interest
Financial institutions, including banks, have specific obligations for reporting interest income to both taxpayers and the IRS. When the interest earned in an account for a calendar year exceeds a certain threshold, typically $10, the bank will issue Form 1099-INT, “Interest Income.”
Form 1099-INT includes important details such as the payer’s name (the bank), the recipient’s name and taxpayer identification number, and the total amount of interest paid during the year. This document is typically mailed to taxpayers by the end of January following the tax year.
Even if a taxpayer does not receive a Form 1099-INT, the interest income is still considered taxable. If the total interest earned is less than the $10 reporting threshold, the bank is not required to issue the form. However, all interest income must still be included when filing a federal income tax return.
Including Bank Interest on Your Tax Return
To report bank interest on your federal income tax return, Form 1040, use the amount shown in Box 1, “Interest income not included in box 3,” of Form 1099-INT. This is the total taxable interest earned from the bank during the tax year.
Interest income is reported on Schedule B, “Interest and Ordinary Dividends,” if the total taxable interest from all sources exceeds $1,500. If your total taxable interest is $1,500 or less, report it on Line 2b of Schedule 1 of Form 1040.
If you did not receive a Form 1099-INT because your interest income was below the reporting threshold, determine the total interest earned from your bank statements. This self-calculated amount is then reported in the same manner as if you had received a 1099-INT.