CD interest counts as taxable income, so Uncle Sam gets a cut
If you’ve saved money in a CD, you will need to pay tax on the income earned from interest. The amount of tax you’ll pay on your CD interest depends on your overall taxable income.
The only exception is interest earned from IRA CDs – retirement accounts – which is not subject to taxation.
When are CDs taxable?
As a US citizen, you must pay tax on all the income you receive each year, including interest income earned from savings accounts and CDs. So if you’ve earned interest on a CD in the past financial year, you’ll need to declare that amount on your next tax return.
Even if you decide to roll the interest back into the same account – applying it to the principal – you’ll still owe taxes on that interest.
Here’s how much tax you’ll pay on CD interest
The interest you earn on your CD is considered “ordinary income” and will be taxed at the same rate that applies to the rest of your income. In the US, tax rates are organized into brackets; the more you earn, the more you’ll pay. Here’s what that looks like in 2019:
| Taxable income | Tax you must pay on this income |
|---|---|
| $0 to $9,525 | 10% of taxable income |
| $9,526 to $38,700 | $950.50 plus 12% on the amount over $9,525 |
| $38,701 to $82,500 | $4,453.50 plus 22% on the amount over $38,700 |
| $82,501 to $157,500 | $14,089.50 plus 24% of the amount over $82,500 |
| $157,501 to $200,000 $200,001 to $500,000 $500,001 + | $32,089.50 plus 32% of the amount over $157,500 $45,689.50 plus 35+ of the amount over $200,000 $150,689.50 plus 37% of the amount over $500,000 |
When to declare interest earned on CDs
The IRS requires US citizens to pay taxes on CD interest in the financial year it was earned. If your CD has a term of less than one year, the process is relatively straightforward: you will declare any interest payments received on your tax return for that year.
However, you also need to pay interest on tax earned along the way – that is, before that CD has reached maturity. So if you receive regular installments of interest payments, that amount must be added to your overall taxable income in the financial year when it was paid.
When the term ends and your money is returned, the cash is usually considered a return of principal and is not eligible for additional tax.
What is Original Issue Discount?
Original Issue Discount (OID) refers to the situation in which interest paid is deferred for 1 year or more. However, OID is still considered a form of interest. So even if your bank doesn’t pay you directly, you still owe the IRA taxes on the interest accumulating in the account. Your bank should send you a “phantom interest” form, also known as a 1099-OID, to indicate interest that has accumulated.
What if I decide to roll over my interest earnings into a new CD?
When a CD matures, many people choose to automatically roll over their initial deposit and any interest earned into a new CD account. However, if you choose this option and re-invest your interest rather than accessing it, you will still need to declare the interest on your tax return.
If it’s a joint CD the interest payments are split equally.
If your CD is a joint account, for example if you share ownership with your partner, the FDIC assumes that each person has equal ownership of the funds in the account. The interest paid each financial year is therefore equally split between each account holder – 50% each if there are two account holders.
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Tax tips for CDs
Want to minimize the tax you have to pay on CD interest? Keep the following tips in mind:
- Consider how you structure your CDs. If you earn more income than your partner and you’re likely to face a sizable tax bill, you might want to consider structuring new CDs so that they’re held in your partner’s name or perhaps owned jointly.
- Providing your Tax Identification Number (TIN) to your bank will help at tax timeWhen you open a CD, your bank will likely ask for your TIN. Giving your TIN isn’t mandatory, but it’s probably in your best financial interest because if you don’t, the bank is required to send a portion of all interest earned on the CD account to the IRS. If you’ve already opened an account and didn’t give your TIN, get in touch with your financial institution to update its records.
Bottom line
Just like with interest earned on savings accounts, tax must be paid on CD interest you receive in any given year. To find a CD that’s worth your while – with APYs up to 3.1% – browse providers to see what they have to offer.