Why is Treasury bill interest exempt from state income tax in the US?

It stems from the doctrine of intergovernmental tax immunity, which holds that one level of US government cannot tax the financial instruments of another. States are prohibited from taxing direct obligations of the federal government — that includes T-bills, T-notes, T-bonds, and US savings bonds. This is a structural constitutional feature, not a discretionary tax preference, and it cannot be removed without a constitutional amendment.

Do I have to report savings interest under $10?

Yes, technically. The $10 threshold is the level at which the *bank* must issue a Form 1099-INT. You as a taxpayer are required to report all taxable interest income regardless of whether you received a 1099. In practice, very small amounts under $10 are rarely audited, but the legal requirement is to report all interest.

Is interest in a Roth IRA really tax-free forever?

Yes, on qualifying distributions. The account must be open at least 5 years and the distribution must be after age 59½ (or for one of several qualifying exceptions, including first-time home purchase up to $10,000 lifetime, qualified higher education expenses, or unreimbursed medical expenses above 7.5% of AGI). Non-qualifying early distributions of *earnings* (not contributions) are subject to ordinary income tax plus a 10% penalty.

How is GIC interest taxed in a Canadian TFSA?

It is not taxed at all. Interest, dividends, and capital gains earned inside a TFSA are entirely tax-free, with no reporting required on your Canadian tax return. The catch is the contribution room limit — you can only put in your annual TFSA contribution room (CA$7,000 in 2024) plus any unused room carried forward from prior years. Contributions over your limit incur a 1%-per-month penalty on the excess.

How Savings Interest Is Taxed: Federal, State, and Provincial Treatment

US: federal treatment of interest income

For US federal income tax purposes, interest from all of the following is ordinary income, taxed at your marginal federal income tax rate:

High-yield savings accounts (HYSAs)
Certificates of deposit (CDs)
Money market deposit accounts (MMAs)
Cash management accounts (CMAs)
Treasury bills, notes, and bonds (federally taxable, but see state-level note below)
Money market mutual funds (taxed as ordinary dividends — same effective rate)

You'll receive Form 1099-INT from each financial institution that paid you more than $10 of interest during the year. Box 1 reports taxable interest from bank deposits; Box 3 reports interest from US Treasury obligations. The numbers go on your Form 1040 Schedule B.

For 2026 federal brackets (single filer): 12% bracket up to ~$48,000, 22% bracket up to ~$103,000, 24% bracket up to ~$197,000, 32% up to ~$251,000, 35% up to ~$627,000, 37% above. Your marginal tax rate is the rate applied to your *next* dollar of interest. A saver earning $1,000 of interest in the 24% bracket loses $240 to federal tax; their effective after-tax yield on a 4.50% APY HYSA is 4.50% × (1 − 0.24) = 3.42%.

US: state and local treatment

Most states treat interest from bank deposits the same way the federal government does — ordinary income at the state's marginal rate. California, New York City, Hawaii, Oregon, Minnesota, and New Jersey are notable for high marginal rates that meaningfully reduce after-tax savings yield. Florida, Texas, Washington, Tennessee, Nevada, South Dakota, Wyoming, and Alaska have no state income tax on interest income.

The big exception: interest from US Treasury securities (T-bills, T-notes, T-bonds, EE/I savings bonds) is exempt from state and local income tax. This is a structural feature of federal supremacy doctrine, not a discretionary tax break — states cannot tax direct US obligations.

The T-bill taxable-equivalent yield calculation

The state-tax exemption for Treasury interest can swing the yield comparison between T-bills and HYSAs in high-tax states.

The taxable-equivalent yield (TEY) of a T-bill is:

TEY = T-bill APY ÷ (1 − state marginal rate)

Worked example, California top bracket (13.3% state rate):

A 4.30% T-bill earns the same after-tax return as an HYSA paying:

4.30% ÷ (1 − 0.133) = 4.30% ÷ 0.867 = 4.96%

So a 4.30% T-bill is the after-tax equivalent of a roughly 4.96% taxable HYSA for a top-bracket California saver. If the best HYSA available pays less than 4.96%, the T-bill wins.

Worked example, no-income-tax state (Texas, 0% state rate):

4.30% ÷ (1 − 0) = 4.30%

The T-bill TEY equals its raw yield. The state-tax exemption is irrelevant. A Texas saver should compare T-bills against HYSAs purely on raw yield.

US: tax-advantaged options for savings interest

Most savings interest can be earned tax-free or tax-deferred inside specific account wrappers:

Roth IRA: Interest grows tax-free; qualifying distributions are tax-free. Annual contribution cap (~$7,000 in 2026 with catchup for over-50s).
Traditional IRA / 401(k): Interest grows tax-deferred; distributions are taxed as ordinary income.
Health Savings Account (HSA): Interest grows tax-free; distributions for qualified medical expenses are tax-free.
529 plan: Interest grows tax-free; distributions for qualified education expenses are tax-free; many states offer additional state tax deductions for contributions.

These are not full substitutes for an emergency fund — IRAs and 529s have penalties for early non-qualifying withdrawals. But for long-term savings goals (retirement, education, long-term medical reserves) they can eliminate the federal tax drag entirely.

Canada: federal and provincial treatment

In Canada, interest income is taxed as regular income at your combined federal + provincial marginal rate. Federal brackets for 2026 run from 15% (lowest) to 33% (highest above ~CA$246,000); provincial rates stack on top. A top-bracket Ontario resident pays a combined marginal rate of about 53.5% on interest income.

Canada offers several registered account types that shelter interest from tax entirely or defer it:

TFSA (Tax-Free Savings Account): Interest grows tax-free; withdrawals are tax-free with no minimum age. Annual contribution room (CA$7,000 in 2024; check current year). The single highest-leverage shelter for retail savings in Canada.
RRSP (Registered Retirement Savings Plan): Contributions are tax-deductible; interest grows tax-deferred; withdrawals are taxed as ordinary income at your marginal rate at the time of withdrawal.
RESP (Registered Education Savings Plan): Interest grows tax-deferred; matched by federal Canada Education Savings Grant (CESG) up to CA$500/year.
FHSA (First Home Savings Account): Contributions are tax-deductible; interest grows tax-free; qualified withdrawals for first home purchase are tax-free.

GIC interest in a TFSA, HISA interest in a TFSA, and any other interest earned inside a TFSA: all entirely tax-free with no reporting required on your Canadian tax return.

How Savings Interest Is Taxed in the US and Canada