Is Bank Interest Income Considered Taxable?

Interest earned from a bank account is considered taxable income by the Internal Revenue Service (IRS). This means any interest you receive from your savings, checking, or other bank accounts must be reported on your federal income tax return. The IRS views this interest as a form of income, and it is subject to ordinary income tax rates.

Identifying Taxable Interest Income

The IRS definition of taxable interest is broad and includes income from sources such as:

• Savings accounts
• Checking accounts
• Certificates of deposit (CDs)
• Money market accounts

When you deposit money into these accounts, the financial institution pays you interest, which is classified as income that must be reported.

Beyond bank accounts, other forms of interest are also subject to taxation. For instance, if you receive an income tax refund from the IRS, any interest paid along with that refund is taxable. Interest earned on U.S. Savings Bonds is taxable on your federal return but holds the advantage of being exempt from state and local income taxes.

Required Tax Documentation

To facilitate tax reporting, financial institutions issue Form 1099-INT, “Interest Income,” to both the taxpayer and the IRS. This document reports interest payments made during the calendar year. It details the total amount of taxable interest you received from a specific payer in Box 1. For U.S. Savings Bonds, the interest earned is reported in Box 3.

A bank or other financial institution is only required to send you a Form 1099-INT if it paid you $10 or more in interest during the tax year. This rule can cause confusion, but the $10 rule is a requirement for the payer, not the recipient.

Even if your interest income from a single source is less than $10 and you do not receive a Form 1099-INT, you are still legally obligated to report all interest earned. To find the exact amount of interest you earned, you can review your monthly or annual bank statements. You are responsible for aggregating all interest from all sources to report the correct total on your tax return.

How to Report Interest on Your Tax Return

The method for reporting interest income on your federal tax return depends on the total amount you received from all sources. If your total taxable interest for the year is $1,500 or less, you can report this total amount directly on Form 1040, “U.S. Individual Income Tax Return,” on the line designated for taxable interest.

A different procedure is required if your total interest income from all sources exceeds the $1,500 threshold. In this situation, you must complete and attach Schedule B, “Interest and Ordinary Dividends,” to your Form 1040. This schedule provides the IRS with a detailed breakdown of your interest income sources.

In Part I of the form, you must list the name of each payer and the corresponding amount of interest you received from that specific payer. After listing all individual interest amounts, you will sum them up and enter the total on the designated line on Schedule B. This final total is then transferred to the taxable interest line on your Form 1040.