Does Bank Interest Count as Taxable Income?
Understand the tax obligations for bank interest, including how the IRS classifies this income and what is required for proper reporting.
Interest earned from a bank account is considered taxable income by the Internal Revenue Service (IRS) and must be reported on your annual tax return. The IRS defines taxable interest as any amount credited to your account that is available for withdrawal. This applies to money from sources like savings accounts, checking accounts, certificates of deposit (CDs), money market accounts, and certain dividends from credit unions.
Understanding Taxable Interest Income
The interest you earn is taxed at your ordinary income tax rates, the same rates that apply to your salary. For example, if you are in the 22% tax bracket, the interest earned from your bank is also taxed at 22%. This differs from other investment income, such as long-term capital gains, which can be taxed at lower rates. All interest is considered taxable unless it is specifically designated as tax-exempt, which is rare for bank accounts.
The Role of Form 1099-INT
Financial institutions report interest payments to you and the IRS using Form 1099-INT, Interest Income. A bank, credit union, or brokerage is required to issue this form if it pays you $10 or more in interest during a calendar year. You will receive your copy of the form by January 31 of the year following the year the interest was paid.
The figure for most taxpayers is in Box 1, which shows the total taxable interest paid to you. While this is the amount you report, it is a common misconception that interest is not taxable if you do not receive a Form 1099-INT. You are legally required to report all interest income you earn, regardless of whether you receive a form.
The IRS receives a copy of every Form 1099-INT issued and uses automated systems to match this information to individual tax returns. Failing to report the interest shown on a Form 1099-INT will likely trigger a notice from the IRS, such as a CP2000. This notice proposes additional tax, penalties, and interest on the unreported income.
How to Report Interest Income on Your Tax Return
When you file your tax return, you must report your taxable interest directly on Form 1040, the U.S. Individual Income Tax Return. You will enter the total amount of your taxable interest on the line designated for this income, which is typically line 2b.
If your total taxable interest for the year is more than $1,500, you must also file Schedule B, Interest and Ordinary Dividends. On this schedule, you are required to list each payer of interest and the amount received from each. The total from Schedule B is then entered on your Form 1040.
You may still need to file Schedule B even if your interest income is below the $1,500 threshold. Other circumstances that require filing the form include receiving interest from a seller-financed mortgage or having a financial account in a foreign country.
Special Considerations for Interest Income
For joint bank accounts, tax reporting depends on the Social Security number linked to the Form 1099-INT. The primary account holder is responsible for reporting the interest income. If the interest is split, the primary holder reports the full amount and then subtracts the other owners’ shares as a “nominee distribution” on Schedule B.
Interest earned on a child’s custodial account, such as a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account, is taxable and may be subject to “kiddie tax” rules. For 2025, the first $1,350 of a child’s unearned income is not taxed. The next $1,350 is taxed at the child’s tax rate, and any unearned income over $2,700 is taxed at the parents’ marginal tax rate. These rules are designed to prevent parents from shifting investment income to their children to avoid taxes.