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A certificate of deposit can be a great way to grow your money at a predictable rate. Unlike savings accounts, whose rates can change anytime, your CD rate is fixed for the entire term, so your earnings are guaranteed. However, the government wants its share of those earnings.
When it’s time to file your tax return, you’ll need to report any interest you’ve earned on your CD over the tax year. You’ll also need to pay taxes on a percentage of it. Here’s what you need to know to make sure you’re doing everything right.
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How are CDs taxed?
“Interest paid on your CDs will be taxed as ordinary income just like wages when you file your taxes,” said Lisa Greene-Lewis, a certified public accountant with TurboTax.
That means your CD interest is taxed at your ordinary federal income tax rate based on your tax bracket. Tax rates for the year 2024 range from 10% to 37% and depend on your income and filing status, Greene-Lewis said.
When do you pay taxes on a CD?
If you earn at least $10 in interest from a CD during a year, your financial institution must report that interest to the IRS. If you invest in a short-term CD that matures the same year it was purchased, you’ll have to pay tax on it for that year. If you invest in a long-term CD that matures after 12 months or more, you’ll have to pay taxes on whatever interest accrues annually along the way.
“The interest will be reported and claimed on your taxes for the year it was paid,” Greene-Lewis said.
For example, let’s say you opened a two-year CD in January 2024 that matures in January 2026. When you file your 2024 tax return, you’ll pay taxes on the interest you accumulated in the CD through the end of that year. When you file your 2025 return, you’ll pay taxes on the interest earned that year. And in 2026, you’ll owe taxes on the interest accumulated in January of that year.
You should receive Form 1099-INT reporting how much interest you earned each tax year by Jan. 31, Greene-Lewis said. But “even if you don’t receive a copy, you still should report the interest earned on your taxes,” she said.
Are CD earnings subject to federal and state taxes?
The interest you earn on a CD is subject to federal, state and local taxation, with tax laws varying by jurisdiction. Unless you live in a state with no income tax, you should expect to owe both federal and state taxes on your CD interest.
Since state-level tax brackets are a bit more complicated than federal tiers, you can use this breakdown from the Tax Foundation to get an estimate of the percentage of your CD earnings that will go to the state government. Note that state laws on interest income vary widely. New Hampshire, for example, just eliminated its state tax on interest and dividends.
Fifth Third’s CD Maturity Calculator is a helpful tool for estimating your federal and state tax bill (toggle the advanced feature to access it).
How does withdrawal from a CD affect your taxes?
You’ll pay taxes on your CD interest regardless of whether you withdraw the money.
For example, let’s say you open a five-year CD right now and plan to leave it untouched until the term is up. You’ll be paying taxes on interest until the CD reaches maturity, and you’ll receive a 1099-INT form for every year the CD accrues interest.
If you decide to take out your money before the CD matures, most banks and credit unions will hit you with an early withdrawal penalty. You can deduct the cost of the penalty on your taxes, reducing what you owe.
So let’s say you earned $70 in interest in a calendar year, but you paid a $45 early withdrawal penalty because you needed the funds before the term was over. You’ll owe taxes only on $35 of interest.
How do you report CD interest on your tax return?
Your bank or credit union will likely mail you a copy of your 1099-INT form, or you can access it through your online account.
The interest you’ve earned will be in Box 1 of the form. You’ll need to enter that number in the “taxable interest” section of whatever tax return form you file with the IRS. If you earned more than $1,500 in interest and dividends between your CD and other investments, you’ll need to file a Schedule B.
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Can you delay paying taxes on CD interest?
You can’t avoid reporting CD interest on your tax return, but you may be able to delay your payment obligation.
“You can potentially lower or avoid paying taxes on CD interest by purchasing a CD in a tax-advantaged account like an IRA or 401(k),” Greene-Lewis said. By putting your CD in one of these tax-deferred accounts, you won’t pay taxes on the interest until you withdraw the funds during retirement, she said.
The upside is that you may be in a significantly lower tax bracket when you retire. The downside is that your interest earnings from CDs will likely be much lower than you’d get from riskier investments in the stock market. So while you can shrink your tax bill with this approach, you might be limiting your overall retirement fund.
The bottom line
A certificate of deposit can be a valuable part of your savings strategy, but when you’re calculating your interest earnings, don’t forget that the government will want its share.
Tax reporting has many nuances: standard versus itemized deductions, charitable contributions, mortgage interest deductions and more. It might be worth it to hire a tax professional to ensure you follow the appropriate guidelines and minimize your stress.
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