Interest earned on savings, money market, and CD accounts is taxable ordinary income in the year it's credited to your account — not when you withdraw it. Your bank issues Form 1099-INT if it pays you $10 or more in a year, but every dollar of interest is taxable even if you never receive the form. It's taxed at your regular federal income tax rate, not a lower capital-gains rate.
Interest is one of the few forms of investment-style income that gets no special tax treatment — it's taxed the same as wages, at your ordinary federal income tax rate, in the year the bank credits it to your account. That's true whether the interest came from a savings account, a money market account, or a CD, and it's true even if you never touch the money.
Per the IRS's guidance on interest income, "most interest that you receive or that is credited to an account that you can withdraw from without penalty is taxable income in the year it becomes available to you." That means interest credited to your savings account on December 31 is taxable for that year — even if you don't withdraw a cent — and interest locked inside a CD you haven't cashed yet is still taxable once it's credited to the account, not deferred until the CD matures.
Your bank sends Form 1099-INT when it pays you $10 or more in interest during the year. The IRS is explicit that the $10 threshold only determines whether you receive the form — you're required to "report all taxable and tax-exempt interest on your federal income tax return, even if you don't receive a Form 1099-INT." A savings account that earned $6 in interest still generates taxable income; it just won't show up on a form the bank sends you.
Interest income is taxed at your marginal ordinary income tax rate (the same bracket structure that applies to wages), not the lower long-term capital gains rate that applies to qualified dividends or investments held over a year. There's no special rate for bank interest regardless of how long the money sat in the account.
Most filers with modest interest income simply enter the 1099-INT total directly on Form 1040. If your combined taxable interest for the year is larger — the long-standing IRS threshold is $1,500 — you generally need to itemize each payer on Schedule B (Form 1040) rather than a single combined line. Confirm the current filing threshold and form instructions at irs.gov before filing.
This is general tax information, not tax advice — confirm your specific filing requirements with a CPA or tax preparer. If you're weighing where to park savings net of tax treatment, ClearValue Banking's account comparison tool lines up posted APYs across institutions.
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