Yes, most interest you earn is taxed as ordinary income at your regular tax rate

Interest from savings accounts, money market accounts, certificates of deposit (CDs), bonds, and loans you make to others all count as ordinary income on your federal tax return. The IRS taxes this interest at the same rate as your wages or salary — meaning it stacks on top of your other income and pushes you into a higher tax bracket if you earn enough.

Your bank or financial institution reports interest to the IRS on a 1099-INT form when you earn $10 or more in a calendar year. You receive a copy and must report it on your tax return, even if you don't receive the form. The tax you owe depends on your total income for the year and your filing status.

Key Takeaways

  • Interest from savings accounts, CDs, bonds, and other sources is taxed as ordinary income at your regular federal tax rate.
  • Banks report interest of $10 or more on Form 1099-INT, which you must report on your tax return even if you don't receive the form.
  • Interest income combines with your other income to determine your tax bracket, so earning more interest can push you into a higher rate.
  • Some interest — such as municipal bond interest — may be exempt from federal tax, though you should verify this with your financial institution or tax professional.
  • State and local taxes also explore to most interest income unless you live in a state with no income tax.

How interest gets reported to the IRS

Financial institutions send Form 1099-INT to both you and the IRS whenever you earn $10 or more in interest during a calendar year. This form lists the total interest paid to you and breaks it down by type — for example, interest from a savings account versus interest from a CD.

You are required to report this interest on your tax return even if you never receive the 1099-INT form. If you have multiple accounts at different banks, you may receive several 1099-INT forms, and you must add up all the interest and report the total. The IRS matches the forms it receives from banks against the income you report, so underreporting interest can trigger an audit notice.

Where interest appears on your tax return

If you file Form 1040 (the standard individual tax return), you report interest income on Schedule 1, Part I, line 8. The total then transfers to your main Form 1040. This interest combines with your wages, self-employment income, capital gains, and any other income you earned that year.

Because interest stacks on top of your other income, earning a large amount of interest can push you into a higher tax bracket. For example, if you earn $50,000 in wages and $5,000 in interest, you are taxed on $55,000 of income. The interest portion may be taxed at a higher rate than your wages because it is your last dollars of income.

Interest that is exempt from federal tax

Municipal bond interest — interest from bonds issued by states, cities, and other local governments — is usually exempt from federal income tax. However, you still must report it on your tax return on Schedule 1, line 1, even though you do not pay federal tax on it. Some municipal bond interest may also be exempt from state and local taxes if you live in the state that issued the bond.

Interest from U.S. savings bonds (Series EE and Series I) can be deferred until you cash the bond or it matures, which may be decades later. You can also choose to report the interest each year instead of waiting. This strategy is useful if you expect to be in a lower tax bracket in the future.

Certain other types of interest — such as interest on some government obligations — may also be exempt. Your financial institution or the bond issuer should tell you whether the interest is taxable. If you are unsure, a tax professional can help you determine the correct treatment.

State and local taxes on interest income

Most states tax interest income as ordinary income, just as the federal government does. The rate varies by state and by your income level within that state. If you live in a state with no income tax — such as Florida, Texas, or Wyoming — you owe no state tax on interest, but you still owe federal tax.

Some states offer limited exemptions for certain types of interest, such as interest on bonds issued within that state. Check your state's tax authority website or speak with a tax professional to learn what applies to your situation.

What happens if you earn a small amount of interest

Even if you earn less than $10 in interest, you must still report it on your tax return. You will not receive a 1099-INT form, but you are responsible for tracking the interest yourself and reporting it. Many people with small savings accounts or CDs earn minimal interest and may overlook this requirement, but the IRS expects all interest to be reported.

If you have multiple accounts and the total interest across all of them reaches $10 or more, the bank that holds your largest account typically sends you a 1099-INT. However, you must still report interest from other accounts even if those banks do not send you a form.

How to reduce taxes on interest income

One strategy is to hold municipal bonds or U.S. savings bonds, which offer tax advantages. Another is to keep large cash balances in high-yield savings accounts only when you need them, since interest is taxed as you earn it each year. Some people also use tax-advantaged accounts like IRAs or 401(k)s, where interest and other investment gains grow without being taxed each year.

If you have substantial interest income, a tax professional can review your situation and suggest strategies that fit your circumstances. They can also help you understand whether you owe estimated taxes during the year rather than waiting until tax time.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

Yes. You must report all interest income on your tax return, even if you earned less than $10. The $10 threshold only determines whether your bank sends you a 1099-INT form — it does not determine whether you must report the interest.

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 only difference is the rate of interest you earn — CDs typically pay more than savings accounts — but the tax treatment is the same.

What if I earned interest but did not receive a 1099-INT form?

You still must report the interest on your tax return. Contact your bank to ask for a copy of the form, or calculate the interest yourself using your account statements. The IRS expects all interest to be reported regardless of whether you receive a form.

Can I deduct losses from interest income?

No. Interest income is added to your other income and taxed. You cannot offset it with losses unless those losses are capital losses from investments, and even then, capital losses have strict limits on how much you can deduct each year.

Does interest from a loan I made to a friend count as taxable income?

Yes, if you charged interest. The IRS requires you to charge a minimum interest rate (the applicable federal rate) on loans to family members and friends, and any interest you receive must be reported as ordinary income on your tax return.