The rule
IRS Tax Topic 403 states it in one line: interest is taxable income in the year it becomes available to you. The examples it lists cover the everyday cases, interest on bank accounts, money market accounts, certificates of deposit and corporate bonds, and the words "becomes available" settle the timing question. Interest credited to the account on December 31 belongs to that year's return even if it was never withdrawn. Interest is ordinary income: it is added to wages and taxed through the bracket rates, not at the lower rates that apply to long-term capital gains.
How it reaches your return
- Form 1099-INT. A bank or broker that paid you US$10 or more of interest, taxable or tax-exempt, sends this form to you and to the IRS after the year ends. The amounts on it are what the IRS expects to see on your return.
- Below US$10. No form, same obligation: Topic 403 says all taxable and tax-exempt interest must be reported, with or without a form.
- Where it goes. Taxable interest is reported as income on Form 1040; Schedule B, Interest and Ordinary Dividends, lists the payers when the total is large enough to require it and is also where excludable savings bond interest is shown.
- Usually no withholding. Interest normally arrives without income tax taken out, so a large interest income can produce a balance due in April; the estimated tax guide covers when quarterly payments are needed.
What is tax-free
Topic 403 names two cases. Interest on bonds issued by a state, the District of Columbia or a US territory to finance government operations is exempt from federal income tax, although it still has to be reported, and the reporting does not make it taxable. And interest on Series EE and Series I savings bonds issued after 1989 can be excluded from income when the proceeds pay for qualified higher education expenses and the program's requirements are met; otherwise savings bond interest is reported when the bond matures or is cashed, unless you elect to report it each year. Everything else, including the interest on a high-yield savings account or a CD, is taxable.
What a 4 percent APY keeps after federal tax
Because interest is taxed at the bracket rate, the after-tax yield is the APY times one minus your marginal rate. For a 4 percent account in 2026:
| Marginal bracket | After-tax yield on 4% APY |
|---|---|
| 10% | 3.60% |
| 12% | 3.52% |
| 22% | 3.12% |
| 24% | 3.04% |
| 32% | 2.72% |
| 35% | 2.60% |
| 37% | 2.52% |
A worked example: $20,000 at 4 percent earns $800 in a year. A single filer in the 22 percent bracket owes $176 of federal income tax on it and keeps $624, an after-tax yield of 3.12 percent. State income tax, where there is one, comes off as well. The compound interest calculator shows the pre-tax growth year by year, and the CD calculator the amount a certificate pays at maturity; apply the after-tax factor from the table to either result to see what you actually keep.
Against inflation
The after-tax yield is the number to set against the inflation rate, because tax is charged on the whole nominal interest, not on the part above inflation. If prices rise 3 percent and the account pays 4 percent, a saver in the 22 percent bracket keeps 3.12 percent and comes out barely ahead; in the 32 percent bracket the same account loses buying power. The CPI guide explains where the inflation figure comes from, and the savings goal calculator works with whatever rate you enter, so entering the after-tax yield gives a realistic timeline.
Three things that are not interest
- Dividends from stocks and funds are reported on Form 1099-DIV and may qualify for the lower capital gains rates; the dividend guide covers them.
- Gains from selling a bond or a fund are capital gains, with their own rates and holding-period rules; the capital gains tax calculator applies them.
- Interest inside a tax-advantaged account, such as a 401(k), an IRA or an HSA, is not taxed as it accrues; the rules of the account decide if and when it is taxed on the way out.
Frequently asked questions
Is interest on a savings account taxable?
Yes. IRS Tax Topic 403 says interest is taxable income in the year it becomes available to you, and lists interest on bank accounts, money market accounts, certificates of deposit and corporate bonds among the examples. It is taxed as ordinary income at your bracket rate, not at the lower capital gains rates.
Do I pay tax on interest if I never withdrew it?
Yes. The test is when the interest becomes available to you, not when you move it. Interest credited to your account in December counts for that year even if it stays in the account; for a CD, the interest is taxable as it is credited unless the terms keep it from being available until maturity.
What if I earned less than $10 of interest?
It is still taxable. The $10 figure is the threshold at which a bank must send you Form 1099-INT; Topic 403 says you must report all taxable and tax-exempt interest on your return even if you receive no form.
Which interest is tax-free?
Interest on certain bonds issued by a state, the District of Columbia or a US territory to fund government operations is exempt from federal income tax, per Topic 403, though it still has to be reported. Interest on Series EE and I savings bonds issued after 1989 can be excluded when the money pays for qualified higher education expenses and the program requirements are met.
How much of a 4 percent APY do I keep?
It depends on your bracket. At 12 percent you keep 3.52 percent, at 22 percent 3.12 percent, at 24 percent 3.04 percent, before any state income tax. Compare that after-tax figure with inflation to see whether the money is gaining or losing buying power.
Sources
- IRS Tax Topic 403, Interest received (interest is taxable in the year it becomes available; bank accounts, money market accounts, CDs and corporate bonds; Form 1099-INT at US$10 or more; report all interest even without a form; tax-exempt government bond interest; Series EE and I bonds and the education exclusion)
- IRS Revenue Procedure 2025-32: 2026 tax rate tables (PDF)