Is bank interest taxable?

The short answer, and what it depends on

Bank interest is taxed as ordinary income at your regular bracket rates, not at the lower capital gain rates. Publication 550 states the timing rule plainly: interest is income when it is received or credited to your account and can be withdrawn. You do not need to take the money out, and a high-yield savings account that compounds monthly creates taxable interest each month even if you never touch the balance. The only real “it depends” is on which year deferred-interest accounts count the interest, and on a short list of exceptions.

What counts as taxable interest

The publication’s general list of taxable interest sources includes bank accounts, loans you make to others, and other sources. Several items catch people by surprise. Interest on U.S. Treasury bills, notes and bonds and on obligations of federal agencies is taxable for federal income tax. Interest on tax refunds is taxable. A gift for opening an account can be interest: for deposits under $5,000, gifts or services valued over $10 are reported as interest, and for deposits of $5,000 or more the threshold is $20. The publication’s example: you deposit $800, the account earns $20, and you also receive a $15 calculator, so your 1099-INT shows $35 of interest.

“Dividends” paid by credit unions, savings and loan associations, cooperative banks and mutual savings banks on deposits are really interest, and they appear on Form 1099-INT. Money market funds from brokerages pay dividends instead and are reported as dividend income.

Certificates of deposit and the early withdrawal penalty

If a CD or other deferred-interest account pays interest at fixed intervals of one year or less, you include it when you receive it or are entitled to it without paying a substantial penalty. The same is true for accounts that mature in one year or less and pay a single payment at maturity. If interest is deferred for more than one year, the original issue discount rules apply.

When you withdraw from a CD before maturity, the bank may charge a penalty. Your Form 1099-INT shows the interest in box 1 and the penalty separately in box 2. The publication says you must include all of the box 1 interest in income, with no reduction for the penalty, and you can deduct the penalty on Schedule 1 (Form 1040), line 18. Try $575 of interest and a $310 penalty in the calculator: $575 is reported, $310 is a separate adjustment, and you actually received $265. Because the penalty is an adjustment to income, it reduces your tax even if you do not itemize.

Money you borrowed to open the CD

The publication also gives an example of a $10,000 CD where you borrow $5,000 from the bank to meet the minimum. The CD earns $575 at maturity, but you receive only $265 because $310 of loan interest is netted. You must include the full $575 in income. If you itemize, you can deduct the $310 as investment interest, up to your net investment income. The two items are treated separately.

Exceptions and special cases

• Frozen deposits. Interest you could not withdraw at year end because the institution is or may become insolvent is excluded until you can withdraw it. With $100 credited, $80 withdrawn and nothing further available, you include $80 and defer $20.
• IRAs. Interest earned inside an IRA is generally not taxed in the year earned. Taxation is deferred until a distribution, and Roth rules differ. Do not report IRA interest as tax-exempt interest.
• VA insurance dividends. Interest on insurance dividends left on deposit with the Department of Veterans Affairs is not taxable.
• Joint accounts and nominees. If your Social Security number is on a joint account but part of the interest belongs to someone else, you report the full amount on Schedule B and subtract the other person’s share as a “Nominee Distribution.” The publication’s example: a joint account earns $1,500 and your sibling owns 30%, so $450 is subtracted.

Where to report

Report your total taxable interest on Form 1040 or 1040-SR, line 2b. You must complete Schedule B, Part I if you had over $1,500 of taxable interest or ordinary dividends, and in several other cases, such as nominee interest or frozen-deposit interest. On Schedule B you list each payer by name with the amount received. Report tax-exempt interest from municipal bonds separately on line 2a.

A rough tax estimate

Interest is added to your other income, so the tax on it is the interest times your marginal federal rate. At a 22% marginal rate, $1,000 of savings interest adds about $220 of federal income tax, before any state tax. Entering your rate in the calculator applies this arithmetic to the net interest. Compare account rates on one basis with the APY to APR converter, and see where your rate falls on the federal tax brackets page.

Limits of this page

This page covers federal tax on interest paid to individuals. It does not cover state tax, original issue discount, savings bond rules, or interest paid to businesses.

Sources

• IRS Publication 550, Investment Income and Expenses (2025): Interest Income, Taxable Interest—General, Certificates of deposit and other deferred interest accounts, Interest subject to penalty for early withdrawal, Frozen deposits, Nominee distributions, Penalty on early withdrawal of savings and How To Report Interest Income in chapter 1. Page last reviewed or updated by the IRS April 30, 2026. Read November 2, 2026.

Edition read: Publication 550 (2025), for use in preparing 2025 returns. Dollar limits and thresholds quoted on this page are for 2025 and can change; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it. Marked for human review.