Interest income is taxed as ordinary income at your regular tax rate
Most interest you earn — from savings accounts, money market accounts, bonds, CDs, and loans you make to others — gets added to your other income and taxed at whatever rate applies to your total earnings for the year. The IRS does not treat interest as a special category. It goes on your tax return the same way wages do, which means a dollar of interest is taxed at the same percentage as a dollar of salary.
The main exception is municipal bond interest, which is usually exempt from federal tax. Some state and local bonds are also exempt from state tax. But unless you own municipal bonds specifically, the interest you receive will be ordinary income.
You report interest on Form 1040, Schedule B if you earned more than $1,500 in interest during the year. If you earned $1,500 or less, you can report it directly on Form 1040 without Schedule B, though many people file Schedule B anyway to keep records clear. Your bank, credit union, or investment firm sends you a Form 1099-INT in January showing how much interest you earned in the previous year.
Key Takeaways
- Interest income is taxed at your ordinary income tax rate, not at a special lower rate, so it increases your total taxable income for the year.
- You receive a Form 1099-INT from your bank or investment firm by January 31, and you must report that amount on your tax return.
- If you earned more than $1,500 in interest, you file Schedule B with Form 1040 to report it; smaller amounts can go directly on Form 1040.
- Municipal bond interest is the main exception and is usually not taxed at the federal level, though you still report it on your return.
- Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw it, but interest in a regular savings account is taxed in the year you earn it.
Where interest income appears on your tax return
If you earned $1,500 or less in interest during the year, you report the total on Form 1040, line 2b. You do not need to file Schedule B. straightforward add that amount to your other income sources.
If you earned more than $1,500, you must file Schedule B (Form 1040), Part I. List each source of interest separately — your savings account, your CD, your bond interest, and so on. Add them up and transfer the total to Form 1040, line 2b. The IRS wants to see the breakdown because it helps them match your return against the 1099-INT forms your banks report.
Your Form 1099-INT shows the interest paid to you during the calendar year. If you received multiple 1099-INTs from different institutions, you add all of them together on Schedule B. The total becomes part of your adjusted gross income (AGI), which determines your tax bracket and affects other deductions and credits you may claim.
How interest income affects your tax bracket
Because interest is ordinary income, it stacks on top of your wages, self-employment income, and other earnings. If you earned $50,000 in salary and $2,000 in interest, your taxable income is $52,000 (before deductions). You pay tax on the full $52,000 at whatever rate applies to that total.
This matters because tax brackets are progressive. The more income you have, the higher percentage you pay on each additional dollar. Adding $2,000 in interest might push you into a higher bracket, meaning that $2,000 is taxed at a higher rate than your salary was. Conversely, if you are retired and have little other income, the same $2,000 in interest might be taxed at a lower rate.
Interest income also affects whether you owe the Net Investment Income Tax (NIIT), a 3.8% additional tax that applies to certain investment income if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). Interest counts toward that threshold.
Interest earned in retirement accounts versus regular accounts
Interest earned inside a traditional IRA, 401(k), or other tax-deferred account is not taxed in the year you earn it. The interest compounds tax-free until you withdraw money from the account. At that point, your withdrawal is taxed as ordinary income, but only then.
Interest earned in a regular savings account, money market account, or taxable brokerage account is taxed in the year you earn it, even if you do not withdraw the money. Your bank pays you the interest, and you owe tax on it when ready, whether you spend it or leave it in the account.
A Roth IRA is different again: interest earned inside a Roth is never taxed, as long as you follow the withdrawal rules. This is why Roth accounts are valuable for long-term saving — the interest compounds completely tax-free.
Reporting interest from multiple sources
If you have savings at several banks, a CD ladder, bonds, or money lent to friends or family, each source generates its own 1099-INT (or should). You add all of them together on Schedule B.
Some sources may not send a 1099-INT. If you lent money to a friend and they paid you interest, you still owe tax on it even if you receive no form. You report it on Schedule B as "other interest" and note that no 1099 was issued. The IRS expects you to report all interest, whether or not you receive a form.
If you earned interest in a joint account, the 1099-INT may be issued in one person's name or split between both owners. Check with your bank about how they report joint account interest, and make sure both spouses report their share on their own returns if you file separately.
Municipal bond interest and other exceptions
Interest from U.S. Treasury bonds, notes, and bills is subject to federal tax but exempt from state and local tax. You report it as ordinary income on your federal return.
Interest from municipal bonds issued by states, cities, and local governments is usually exempt from federal tax. You still report it on your return (on Schedule B, line 1a), but you do not include it in your taxable income. Some municipal bonds are also exempt from state tax if you live in the state that issued them.
Interest from savings bonds (Series EE and Series I) can be deferred until you cash them in, and if you use the proceeds for education, some or all of the interest may be excluded from tax. This requires specific conditions and separate reporting on Form 8815.
What to do if your 1099-INT shows the wrong amount
If your Form 1099-INT contains an error — the wrong amount, the wrong taxpayer name, or a duplicate report — contact your bank or investment firm when ready. Ask them to issue a corrected 1099-INT (marked as a correction) and send it to you and the IRS.
If you receive a corrected 1099-INT after you have already filed your return, you may need to file an amended return using Form 1040-X. Do this only if the correction changes your tax liability. If the bank corrects the amount with the IRS but you reported the original (wrong) amount on your return, the IRS will likely catch the discrepancy and contact you.
Keep all 1099-INT forms with your tax records for at least three years. The IRS receives a copy of every 1099-INT issued, so your return must match what your banks report.
Frequently Asked Questions
Do I have to report interest if I earned less than $1,500?
Yes. The $1,500 threshold only determines whether you file Schedule B. Any interest you earn must be reported on your return, even if it is $10. If you earned less than $1,500, report it directly on Form 1040, line 2b, without filing Schedule B.
Is interest from a savings account taxed differently than interest from a CD?
No. Both are taxed as ordinary income at your regular tax rate. The source does not matter — interest is interest. You report both on Schedule B and add them together.
What if I earned interest but did not receive a 1099-INT?
You still owe tax on it. Report it on Schedule B as "other interest" and note that no form was issued. The IRS expects you to report all interest income, whether or not you receive documentation.
Can I deduct interest I paid on a loan?
That depends on the type of loan. Mortgage interest and student loan interest may be deductible. Interest on personal loans, credit cards, and car loans is not. This is separate from reporting interest you earned, which always goes on your return as income.
Does interest in a 529 college savings plan get taxed?
Interest earned inside a 529 plan grows tax-free as long as you use the money for may have access to education expenses. If you withdraw money for non-education purposes, the earnings portion is taxed as ordinary income plus a 10% penalty. Interest earned is not taxed in the year you earn it, only when you withdraw it for non-may have access to reasons.