Is Savings Account Interest Taxable? 1099-INT, State Tax and Kids' Accounts
How interest from savings, money market accounts and CDs is taxed, when you receive a 1099-INT, how to report it, which interest escapes state tax and how the kiddie tax treats children's savings.
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Key takeaways
- Savings, money market and CD interest is ordinary income, taxed at your regular federal rate and usually by your state.
- Banks send Form 1099-INT when they pay you $10 or more, but all interest must be reported.
- Interest on Treasury securities and savings bonds is exempt from state and local income tax.
- A child's interest above $2,700 in 2026 can be taxed at the parents' rate under the kiddie tax.
Higher savings rates are good news, with one side effect: a larger tax bill on the interest. Many savers are surprised by it because nothing is withheld. The rules are straightforward, and a few choices about where you hold cash can reduce the tax.
Please note
General information about U.S. federal tax rules for 2026 as of October 2026; not tax advice. State rules differ.
How interest is taxed
Interest is taxable in the year it is credited to your account and available to you, even if you leave it there. It is added to your other income and taxed at your marginal rate. There is no special lower rate like the one for qualified dividends or long-term capital gains.
Example
You keep $20,000 in a savings account paying 4.2% and earn $840 in a year. In the 22% federal bracket with a 5% state income tax, you owe about $227, leaving about $613 after tax.
Higher-income households may also owe the 3.8% net investment income tax on interest when modified AGI exceeds $200,000 (single) or $250,000 (joint).
Form 1099-INT and how to report
- Banks and credit unions issue Form 1099-INT for interest of $10 or more, usually by January 31.
- Interest below $10 is still taxable and must be reported.
- Report interest on your Form 1040. If your total taxable interest exceeds $1,500, you also file Schedule B.
- If you did not give the bank your taxpayer ID, it may withhold 24% as backup withholding.
How different accounts are taxed
| Account or product | Federal tax | State tax |
|---|---|---|
| Savings, money market account, CD | Ordinary income | Usually taxable |
| Treasury bills, notes, bonds | Ordinary income | Exempt |
| Series EE and I savings bonds | Taxable when redeemed or at maturity (or yearly by election) | Exempt |
| Money market fund | Taxed as dividends (ordinary) | Taxable, except the share from U.S. government obligations in many states |
| Savings inside an IRA, HSA or 529 plan | Tax-deferred or tax-free under account rules | Generally follows federal treatment |
For savers in high-tax states, Treasury bills can pay less than a savings account before tax and still come out ahead after tax.
CDs: watch the timing
Interest on a CD is generally taxable as it is credited, even if you cannot withdraw it without a penalty. A CD that pays all interest at maturity after more than a year is generally subject to original issue discount rules that spread the interest over the term. If you pay an early withdrawal penalty, you can deduct it as an adjustment to income; the bank reports it in box 2 of Form 1099-INT. More in fixed-term deposits explained.
Children's savings and the kiddie tax
A child's interest is the child's income. For 2026, the first $1,350 of unearned income is covered by the dependent standard deduction, the next $1,350 is taxed at the child's rate, and unearned income above $2,700 can be taxed at the parents' rate. The rules apply to children under 18 and, in some cases, to students up to age 23. Details in savings accounts for kids.
Ways to reduce tax on cash savings
- Use tax-advantaged accounts for long-term money: an IRA, a health savings account or a 529 plan.
- Consider Treasury bills or Treasury money market funds if you pay high state income tax.
- Plan for the bill: if you are self-employed or have large interest income, include it in quarterly estimates; see quarterly estimated taxes.
- Do not hold far more cash than you need; long-term money invested in tax-efficient funds may be taxed more lightly.
Frequently asked questions
Do I pay taxes on savings account interest?
Yes. Interest is taxable income in the year it is credited, federally and in most states.
What if my bank did not send a 1099-INT?
You still must report the interest. Banks are only required to send the form when interest is $10 or more.
Is interest from an online savings account taxed differently?
No. Online and traditional bank interest is taxed the same way.
Is Treasury bill interest state tax free?
Yes. Interest on U.S. Treasury securities is exempt from state and local income tax, though federally taxable.
Do I pay tax on interest I did not withdraw?
Yes. Interest is taxable once it is credited to your account and available to you, whether or not you withdraw it.
