How to pay taxes on CD interest

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.

2019 federal income tax brackets

Find your filing status below to see how much you’ll pay for taxes due April 15, 2020 or October 15, 2020 with an extension:

Single filer

Married, filing jointly

Married, filing separately

Head of household

2020 federal income tax brackets

Expand your filing status below to see how much you’ll pay for taxes due in 2021:

Single filer

Married, filing jointly

Married, filing separately

Head of household

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.

CDs you can compare today

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Name	Product	1-year APY	18-month APY	2-year APY	3-year APY	5-year APY
Quontic Bank CD		0.6%		0.75%	1%	1.11%	Lock in a high rate. Minimum of $500 required to open. Open your account in 3 minutes or less	Go to site More Info	Compare	loading Fetching your data...
Radius Bank CDs		0.5%	0.5%	0.5%	0.5%	0.5%	Enjoy a low minimum deposit of $500 and earn 0.5% APY on your balance. Apply online for 1 year, 18 month and 3 year terms.	Go to site More Info	Compare	loading Fetching your data...
CIT Bank Term CDs		0.3%	0.3%	0.4%	0.4%	0.5%	Choose from a range of terms with no maintenance fees and $1,000 minimum to open.	Go to site More Info	Compare	loading Fetching your data...
Discover CDs		0.5%	0.5%	0.5%	0.55%	0.6%	Start saving with $2,500 and enjoy flexible terms from 3 months to 10 years with no account fees.	Go to site More Info	Compare	loading Fetching your data...

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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.

FAQs about paying interest on CDs

• Is interest earned on a CD retirement account (IRA) taxable?

  No – as long as the interest you earn on your IRA stays in the CD account, you won’t be taxed on it. However, if you have a traditional IRA CD you will owe taxes on the interest when you withdraw cash at retirement. But if it’s a Roth IRA CD, then you will never owe taxes on accumulated interest.

• Do I have to pay tax on CD interest earned before the CD account has matured?

  Yes. The IRS requires citizens to pay taxes on income earned from interest each year, even if the CD hasn’t matured yet.

  If the bank only pays interest after the CD has matured, you’re still responsible for paying taxes on interest as it accrues in the account. Request a Form 1099-OID from your bank – this should indicate the amount to include with your income.

• Can I deduct the early withdrawal penalty if I withdraw funds before maturity?

  Yes. If you withdraw cash from your CD before it has matured, you’ll likely have to pay an early withdrawal penalty. But you can deduct the penalty from your taxable income, which helps take the edge off.