How CDs Are Taxed: A Comprehensive Guide to Understanding Your Tax Obligations

Introduction to CDs and Their Tax Implications

Certificates of Deposit (CDs) are a popular savings option for those seeking guaranteed returns on their investments. Unlike other investment vehicles, CDs offer a fixed interest rate for a specific term, making them a low-risk choice for many savers. However, while CDs provide predictable earnings, it’s important to understand that the interest they generate is subject to taxation. The government considers the interest accrued on CDs, savings accounts, and other deposit accounts as taxable income. This means that you must report this income on your tax return and pay the appropriate taxes. Whether you’re a seasoned saver or just starting to explore CDs, understanding how they are taxed is crucial for accurate tax filing and financial planning.

Best Tax Software for Filing Your Taxes

When it comes to filing your taxes, especially if you have income from CDs or other investments, using a reliable tax software can make the process much smoother. Two top-rated options for tax filing are Cash App Taxes and TaxSlayer. Cash App Taxes is a free option that’s ideal for confident filers who want a straightforward and cost-effective way to file their taxes. On the other hand, TaxSlayer is highly recommended for freelancers, gig workers, and sole proprietors, as it offers tailored features to help navigate the complexities of self-employment income. Both options are user-friendly and provide the tools you need to ensure you’re taking advantage of all eligible deductions and credits. For more information on the best tax software for your needs, check out CNET’s comprehensive guide to the Best Tax Software of 2025.

How CDs Are Taxed: Understanding the Basics

The interest earned from CDs is taxed as ordinary income, similar to wages. This means that the interest from your CDs is subject to your federal income tax rate, which ranges from 10% to 37% for the 2024 tax year, depending on your income level and filing status. According to Lisa Greene-Lewis, a certified public accountant with TurboTax, the interest on CDs is taxed at the same rate as your regular income. This applies regardless of whether the CD is short-term or long-term. If you earn at least $10 in interest from a CD in a given year, your financial institution is required to report this interest to the IRS using Form 1099-INT. Even if you don’t receive a copy of this form, you are still obligated to report the interest on your tax return.

When Do You Pay Taxes on CD Interest?

The timing of when you pay taxes on CD interest depends on the length of the CD term. For short-term CDs that mature within the same year they are purchased, you’ll need to pay taxes on the interest earned during that tax year. For long-term CDs that mature after 12 months or more, you’ll pay taxes on the interest as it accrues annually. For example, if you open a two-year CD in January 2024 that matures in January 2026, you’ll pay taxes on the interest earned in 2024 when you file your 2024 tax return, and on the interest earned in 2025 when you file your 2025 return. You’ll also owe taxes on the interest accrued in 2026 when the CD matures. Each year, your bank or credit union will provide you with a Form 1099-INT by January 31, detailing the interest you earned. Even if you don’t receive this form, it’s your responsibility to report the interest on your tax return.

Federal and State Taxes on CD Earnings

The interest from CDs is subject to both federal and state taxes, as well as local taxes in some jurisdictions. If you live in a state with no income tax, you’ll only need to pay federal taxes on your CD interest. However, for most people, this means owing taxes at both the federal and state levels. State tax rates on interest income vary widely, so it’s a good idea to familiarize yourself with your state’s specific tax laws. For example, New Hampshire has recently eliminated its state tax on interest and dividends. To estimate your state tax liability, you can use resources like the Tax Foundation’s breakdown of state tax brackets. Additionally, tools like Fifth Third’s CD Maturity Calculator can help you estimate your federal and state tax bill, especially if you toggle to the advanced features.

Withdrawing from a CD and Its Tax Implications

Withdrawing money from a CD before it matures typically results in an early withdrawal penalty, which can reduce the interest you earn. However, the penalty itself may be deductible on your tax return, which can lower your taxable income. For instance, if you earned $70 in interest in a calendar year but paid a $45 early withdrawal penalty, you would only owe taxes on $25 of interest. It’s important to remember that you’ll still pay taxes on the interest earned, regardless of whether you withdraw the funds early or wait for the CD to mature. If you’re considering withdrawing from a CD, it’s worth consulting with a tax professional to ensure you understand the full implications and can make an informed decision.

Reporting CD Interest on Your Tax Return

Reporting CD interest on your tax return is a straightforward process. Your bank or credit union will provide you with a Form 1099-INT, which lists the interest you earned in Box 1. You’ll enter this amount in the "taxable interest" section of your tax return. If you earned more than $1,500 in interest and dividends from all your investments, including CDs, you’ll need to file a Schedule B. For more detailed guidance on filing your taxes, including how to report CD interest and other investment income, check out CNET’s tax resources and partners. If you’re unsure about any aspect of tax reporting, hiring a tax professional can help ensure you comply with all tax laws and minimize your stress during tax season.

Can You Delay Paying Taxes on CD Interest?

While you can’t avoid reporting CD interest on your tax return, there is a way to delay paying taxes on it. By purchasing a CD within a tax-advantaged account such as an IRA (Individual Retirement Account) or a 401(k), you can defer taxes on the interest until you withdraw the funds during retirement. This approach can be beneficial if you expect to be in a lower tax bracket in retirement. However, it’s worth noting that the interest rates on CDs are generally lower than what you might earn from riskier investments like stocks. While this strategy can reduce your immediate tax burden, it may also limit the growth of your retirement savings.

The Bottom Line: Understanding CD Taxes for Better Financial Planning

A certificate of deposit can be a valuable part of your savings strategy, but it’s essential to consider the tax implications when calculating your potential earnings. The interest from CDs is subject to both federal and state taxes, and you must report this income on your tax return. Whether you choose to keep your CD in a taxable account or place it in a tax-advantaged retirement account, understanding how CDs are taxed will help you make more informed financial decisions. Additionally, using the right tax software and consulting with a tax professional can ensure that you’re in compliance with all tax laws and making the most of your savings. By taking the time to understand how CDs are taxed, you can better plan for your financial future and avoid any surprises when tax season rolls around.