How Are CDs Taxed?

The interest you earn from a CD is taxed as ordinary income. This means those earnings are handled from a tax perspective similar to the salary you receive from your job along with other forms of basic income. Tax rates apply exactly as they would with any other form of ordinary income.

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  • Written By Christian Simmons, CEPF
    Christian Simmons, CEPF

    Christian Simmons, CEPF

    Financial Writer, Certified Educator in Personal Finance

    Christian Simmons is a financial writer who has worked professionally as a journalist since 2016. As an active member of the Association for Financial Counseling & Planning (AFCPE), Christian prides himself on his ability to break down complex financial topics in ways that Annuity.org readers can easily understand.

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    and Marc Guberti, CPFC®
    Marc Guberti, CPFC®

    Marc Guberti, CPFC®

    Certified Personal Finance Counselor

    Marc Guberti is a Certified Personal Finance Counselor® and freelance writer, renowned for his expertise in financial markets and investment strategies. His work has been featured in top publications like U.S. News & World Report, USA Today Blueprint and Fox Business. Based in Scarsdale, New York, Marc balances his career with a passion for running marathons and spending time with his family.

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    Thomas J. Brock, CFA®, CPA
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    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Professional

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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  • Updated: April 23, 2025
  • 4 min read time
  • This page features 3 Cited Research Articles

Key Takeaways

  • CD interest is taxed as ordinary income, not capital gains.
  • You’ll typically receive a 1099-INT form and must report the interest on your tax return, regardless of whether you withdraw the money.
  • Holding a CD inside a traditional IRA or 401(k) defers taxes until you withdraw the money.

Taxation of Certificate of Deposit Income

CD interest is taxed as ordinary income, not capital gains. That means you’ll owe taxes on the interest you earn based on your marginal tax bracket, just like you would on wages or salary.

Higher earners may see more of their CD return eaten up by taxes, as Marc Guberti, CFPC, explains:

“The real return an investor receives differs from what the bank promotes. If your bank’s 1-year CD offers 4.00% APY and your highest dollar is in the 22% tax bracket, you’re only making 3.12% APY on the CD after taxes. If inflation returns to the Fed’s preferred gauge of 2%, you’re real return is only 1.12% APY despite locking up your money for an entire year. Some stocks have dividend yields higher than 1.12%, and those distributions aren’t treated as ordinary income. Real returns are even less for people who are in higher tax brackets”

2025 Tax Brackets

Tax RateSingle IncomeMarried Couple Filing Jointly
10%Up to $11,925Up to $23,850
12%$11,926 to $48,475$23,851 to $96,950
22%$48,476 to $103,350$96,951 to $206,700
24%$103,351 to $197,300$206,701 to $394,600
32%$197,301 to $250,525$394,601 to $501,050
35%$250,526 to $626,350$501,051 to $751,600
37%$626,351 or more$751,601 or more

Exceptions

There are a few ways to potentially reduce the taxes you owe on CD interest.

1. Hold the CD inside a retirement account. If you open a CD within a traditional IRA or 401(k), you can defer taxes on the interest until you begin taking withdrawals from that retirement account.

2. Consider a joint CD. If your spouse or partner is in a lower tax bracket, opening a joint CD could lower your household’s overall tax bill.

For both of these exceptions, it’s important to keep in mind that rules vary by state. While these strategies can help with federal taxes, your state may have its own qualifications.

Holding a CD in a long-term investment vehicle, such as a traditional IRA or 401(k), hasn’t typically been my recommendation due to the significant opportunity cost. However, with the top CDs in the market currently offering around 5.50%, this option has become highly attractive for investors seeking substantial yields without the associated risks.

How To Report Your CD Income

You will receive information on your CD earnings through a 1099-INT form. Your financial institution will typically send this form to you at the beginning of the year.

DID YOU KNOW?

Your 1099-INT form details interest income earned in the previous year.

When you file your tax return, you must report to the IRS any interest of $10 or more that you earn on your CD, even if you don’t receive a 1099-INT.

If your CD’s term is longer than one year, you should also be aware that you will have to report the interest earned by the CD each year, not all at once when the CD matures.

If your CD has a term longer than one year, you still have to report the interest earned each year — not just when the CD matures.

For example, if a five-year CD earns $50 in year one, you’ll need to report that $50 on your tax return for that year. The same goes for any additional interest in years two through five.

Your interest amount will appear in Box 1 of the 1099-INT. You’ll report that number on Schedule B and line 2b of your Form 1040 as taxable interest. If any of your interest is tax-exempt, that goes on line 2a.

Tax Implications of Inheriting a CD

There are tax implications of inheriting a CD. Factors like estate taxes, RMDs and whether the original holder had already paid income taxes can all affect the new owner.

Generally, when a beneficiary inherits a CD, the value of the CD is not taxable to the beneficiary for federal tax purposes. The IRS does not consider inheritances to be income. This includes the deposit amount and interest earned through the date of death. However, any interest earned on the CD after the date of death counts as income to the beneficiary and would be taxable.

Federal estate taxes may apply to assets of a deceased person worth more than $13.61 million as of 2024.

Whether the inherited CD is taxed at the state level depends on which state the beneficiary resides in. Twelve states and Washington, D.C., currently impose estate taxes, while six states impose an inheritance tax.

The tax implications of inheriting a CD can be complex and may vary depending on your specific situation. It can be helpful to consult with a tax professional to determine your specific tax obligations.

Writer Cassidy Horton contributed to this article.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: April 23, 2025