Yes, you pay federal income tax on the interest your money market account earns

The interest a money market account generates is taxable income. The bank or credit union holding your account will report this interest to the IRS on a Form 1099-INT, and you must report it on your federal tax return. This applies whether you withdraw the interest or let it compound in the account.

The tax rate you pay depends on your overall income and tax bracket — the interest is added to your other income for the year and taxed at your marginal rate. If you earned $500 in interest and you are in the 22% tax bracket, you would owe roughly $110 in federal tax on that interest (though your actual liability depends on deductions and other factors).

State and local income taxes also apply to money market interest in most states. A handful of states — including Florida, Texas, and Wyoming — do not tax income at all, so residents there pay no state tax on the interest. Others tax it at rates ranging from roughly 1% to 13%, depending on where you live and your income level.

Key Takeaways

  • Money market account interest is taxable as ordinary income at both federal and state levels in most places.
  • Your bank will send you a Form 1099-INT by January 31 each year showing all interest earned, and you must report this on your tax return.
  • The federal tax you owe depends on your tax bracket, which is determined by your total income for the year.
  • Some states do not tax income at all, while others tax it at rates that vary by state and income level.
  • You can reduce taxable interest by holding money market accounts in tax-advantaged accounts like IRAs or 401(k)s, where growth is tax-deferred or tax-free.

When the bank reports your interest to the IRS

Your bank or credit union must issue a Form 1099-INT if you earned $10 or more in interest during the calendar year. The form arrives by January 31 of the following year and shows the total interest paid into your account during the previous year.

You receive one copy and the IRS receives another. The IRS matches the 1099-INT against your tax return, so if you do not report the interest, the IRS will notice the discrepancy. Even if you earned less than $10 and did not receive a 1099-INT, you are still required to report the interest if you earned any.

If you have multiple money market accounts at different institutions, you will receive a separate 1099-INT from each one. Add all the interest together when you file your return.

How much tax you actually owe on the interest

The federal tax on money market interest is not a flat percentage — it depends on your tax bracket. Your tax bracket is determined by your total taxable income for the year, including wages, investment income, and any other sources.

If you are single and earned $47,150 in wages in 2024, you are in the 22% federal tax bracket. If you then earned $1,000 in money market interest, that $1,000 is taxed at 22%, meaning you owe $220 in federal tax on it (before accounting for deductions or credits). Someone in the 12% bracket would owe $120 on the same $1,000.

Your state tax works similarly. If your state has a 5% income tax and you earned $1,000 in interest, you owe $50 in state tax on top of the federal amount. The combined federal and state tax on that interest could range from roughly 12% to 50% depending on your location and income.

Reducing taxable interest through tax-advantaged accounts

One way to avoid paying tax on money market interest is to hold the account inside a traditional IRA or 401(k). Interest earned inside these accounts grows tax-deferred, meaning you pay no tax on it each year. You only pay tax when you withdraw the money in retirement.

A Roth IRA offers an even better deal: interest earned inside a Roth grows tax-free, and you owe no tax on withdrawals in retirement, as long as you follow the withdrawal rules. This means money market interest inside a Roth IRA is never taxed.

These accounts have annual contribution limits — for 2024, you can contribute up to $7,000 to a traditional or Roth IRA if you are under 50, and up to $23,500 to a 401(k). Not everyone can use these accounts (income limits apply to Roth contributions, and you must have earned income to contribute), but if you are may be able to access, holding a money market account inside one shields the interest from taxation.

State taxes on money market interest vary widely

Nine states currently have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, but is phasing that out). If you live in one of these states, you owe no state tax on money market interest, though you still owe federal tax.

Every other state taxes interest as ordinary income. The rates range from roughly 1% in states like Colorado and Illinois to over 13% in states like California and New York. Some states also have local income taxes on top of the state rate, which can push the total even higher.

If you are considering moving or are planning your finances across state lines, the state tax on savings interest is usually a small factor compared to overall income tax, but it is worth knowing your state's rate.

What happens if you do not report the interest

The IRS will catch unreported interest because your bank reports it on the 1099-INT. If you do not report it on your return, the IRS will send you a notice asking you to pay the tax owed plus interest and potentially penalties.

The penalty for failing to report income is typically 20% of the unpaid tax, though it can be higher if the IRS determines the failure was intentional. Interest accrues on the unpaid amount from the original due date, compounding daily. A small oversight — forgetting to report $500 in interest — can grow into a much larger bill once penalties and interest are added.

If you made an honest mistake, you can file an amended return (Form 1040-X) to correct it. The sooner you do this, the less interest will accrue. If the IRS contacts you first, you can still file an amended return, though you may still owe some interest on the late payment.

Frequently Asked Questions

Do I have to report money market interest if I earned less than $10?

Yes. The $10 threshold only determines whether your bank sends you a 1099-INT form. You are required to report all interest earned, no matter how small. If you earned $3 in interest and did not receive a 1099-INT, you still must report it on your return.

Can I deduct money market account fees from the interest I report?

No. You report the full interest amount on your tax return. Money market fees are not deductible against the interest itself. However, investment-related fees may be deductible as miscellaneous itemized deductions on Schedule A, though this deduction has been limited since 2017 and may not help you depending on your situation.

What if I moved money between accounts during the year — do I get taxed twice?

No. You are taxed on the interest earned, not on transfers between your own accounts. If you moved $10,000 from a checking account to a money market account, that transfer itself is not taxable. You only pay tax on the interest the money market account generates.

Is the interest on a money market account at a credit union taxed differently than at a bank?

No. Interest from a credit union money market account is taxed the same way as interest from a bank. Both institutions report interest on Form 1099-INT, and both are treated as ordinary income for federal and state tax purposes.

Do I owe taxes on money market interest if I am retired and have no other income?

You may not owe federal tax if your total income falls below the standard deduction for your age and filing status, but you must still file a return to report the interest. For 2024, the standard deduction is $14,600 for a single person under 65. If you earned $8,000 in money market interest and had no other income, you would not owe federal tax, but you should still file to confirm this.