If you’ve ever earned money from a savings account, other bank accounts, or bonds, you’ve received interest income. This is the extra amount paid to you for allowing a bank or company to use your money. Interest income can help your savings grow, but it can also complicate your taxes. Here, we’ll take a closer look at what interest income is, how it works, and how it’s taxed.
What is interest income?
Interest income is money you earn in return for allowing a bank, organization, or individual to use your money. You might receive interest income from:
- Interest-bearing funds and bank accounts such as savings accounts, high-yield savings accounts, money market funds, certificates of deposit (CDs), cash management accounts, and some checking accounts
- Bonds, including Treasury bonds, agency bonds, state and municipal bonds, and corporate bonds
- Direct lending, where you loan money to someone and they repay you with interest (often called peer-to-peer lending)
How does interest income work?
Interest income works by rewarding lenders for giving someone else access to their money. When you buy a bond, you’re essentially lending money to the issuer. When you put money into a bank account or a CD, you’re lending those funds to the bank or financial institution. In return, the borrower agrees to pay you interest—usually at a set rate for a set period of time.
By the end of that period, you get your original amount (your principal) back, along with the interest you earned. Because this interest is a payment you receive for lending money, the Internal Revenue Service (IRS) considers it a form of income.
Is interest income taxable?
Yes, in most circumstances interest income is taxable at the federal level and often at the state level as well, although there are some exceptions.
If you earn at least $10 in interest from a single source, you should receive a Form 1099-INT to use when filing your taxes. If your total taxable interest income for the year is $1,500 or more, you’re required to file Schedule B along with your Form 1040. Other situations, such as having a financial interest in a foreign account, can also trigger the requirement to file Schedule B, regardless of the amount of interest earned.
If your interest income is under $1,500, you can report it directly on line 2b of Form 1040. along with your Form 1040.
What is the interest income tax rate?
Most types of interest income are taxed at your federal marginal ordinary income tax rate, which is the same tax rate that you pay on your salary and wages. Depending on your tax bracket, this means that interest will be federally taxed at either 10%, 12%, 22%, 24%, 32%, 35%, or 37%.
Some high-income earners—people with modified adjusted gross income (MAGI) above $200,000 for single filers and $250,000 for couples filing jointly in 2025—may also be subject to the net investment income tax (NIIT). This is an additional 3.8% tax that is levied on the lesser of net investment income (NII) or the excess of MAGI over the threshold. NII mainly includes net realized capital gains, dividends, and interest income.
How is interest income taxed?
How interest income is taxed depends on where the interest comes from and whether it’s available to you right away or paid later.
Interest taxed as ordinary income
Most interest you earn is taxed as ordinary income at the federal level. This includes interest from:
- Interest‑bearing bank accounts
- Certificates of deposit (CDs)
- Peer‑to‑peer lending
- Treasury, agency, and corporate bonds
Interest that may be exempt from federal income tax
Some types of interest are not subject to federal income tax:
- Municipal bonds: Interest from bonds issued by states, cities, counties, or other local governments is generally exempt from federal income tax. If you live in the state that issued the bond, the interest may also be exempt from state income tax.
- US Treasury bonds and savings bonds: Interest from these types of bonds is subject to federal income tax but is exempt from state and local income taxes.
- Earnings in tax‑advantaged accounts (Roth accounts, HSAs, and 529 plans) are generally exempt from federal income tax when distributions are made in accordance with program rules—i.e., qualified Roth withdrawals, HSA distributions for eligible medical expenses, and 529 distributions for qualified education expenses.
Deferred interest income
In most cases, you don’t have to report interest earned in tax‑deferred accounts—such as traditional IRAs, 401(k)s, 403(b)s, SEP IRAs, or SIMPLE IRAs—until you take money out of the account.
For interest earned from certain bonds, you also usually don’t report the interest until it’s actually paid to you, which typically happens when the bond reaches its maturity date.
How do you report interest income on your taxes?
Follow the steps below to report any taxable interest you earned with your tax return for the year.
1. Gather your Form 1099-INTs.
Banks and other financial institutions that pay you at least $10 in interest for the year should send you a Form 1099-INT. This form shows how much interest you earned, and you’ll need it when filing your tax return. Make sure to collect a form from every institution that pays you interest.
If you didn’t receive a 1099‑INT, you still need to report the interest. All interest income must be included on your tax return, even if a form wasn’t issued.
2. Add up all your interest income.
Once you have your forms, total the amount of interest you earned for the year. This number determines how you’ll report the income on your tax return.
3. Report the total on your Form 1040.
If your total interest income is under $1,500, you can enter it on Line 2b of Form 1040. If it’s $1,500 or more, you’ll need to complete Schedule B, which asks for additional details, including who paid the interest and how much each payer contributed.
If your interest income is significant, it may increase the tax you need to pay during the year. In some cases, you may need to adjust withholding or make estimated tax payments to help avoid underpayment or penalties.
Ways to help reduce interest income taxes
Interest income can play a helpful role in growing your savings and supporting a balanced investment approach. While it’s generally taxable, there are ways to reduce how much of that income is taxed.
Some options to consider include:
- Investing in municipal bonds: Interest from these bonds is usually exempt from federal income tax and may also be exempt from state income tax if the bond is issued by your home state.
- Using tax‑deferred accounts: Holding interest‑earning investments—such as bonds—in accounts like traditional IRAs or 401(k)s can delay taxes until you withdraw the money.
- Saving through 529 plans or HSAs: These accounts allow money to grow tax‑free, and withdrawals are also tax‑free when used for qualifying education expenses (529 plans) or qualifying medical expenses (HSAs).
- Choosing investments that create capital gains instead of regular interest: Different investments generate income in different ways. Some, like bonds, typically produce regular interest income, while others may generate returns through price appreciation, which is generally taxed only when the investment is sold. The appropriate mix depends on an investor’s income needs, risk tolerance, and tax situation.
The bottom line on taxes and interest income
Understanding how interest income works and how it’s taxed can make it easier to plan your savings and investment strategy. Even small steps—like choosing the right types of accounts or bonds—can help you manage how much tax you owe and keep more of your earnings working for you. If your situation is complex, a tax professional can help you decide which options fit your financial goals.