CD interest is taxed as ordinary income in the year you earn it, at your regular tax rate

When you hold a certificate of deposit (CD), the bank pays you interest. That interest counts as ordinary income on your federal tax return, which means it is taxed at the same rate as your wages, salary, or other regular income. You do not get a lower tax rate for CD interest just because it comes from savings rather than work.

The tax bill arrives in the year the interest is credited to your account, even if you do not withdraw the money. If your CD matures in December and the bank adds $500 in interest, you owe tax on that $500 in that tax year — you cannot defer it to the next year by leaving the money untouched.

The bank will send you a Form 1099-INT by January 31 showing how much interest you earned. You report this amount on your tax return, and it gets added to your other income to calculate your tax bill.

Key Takeaways

  • CD interest is taxed at your ordinary income tax rate, which depends on your total income and filing status.
  • You owe tax on the interest in the year it is credited to the account, regardless of whether you withdraw it.
  • The bank reports your CD interest on Form 1099-INT, which you receive by January 31 each year.
  • Interest from CDs held in tax-advantaged accounts like IRAs or 401(k)s is not taxed until you withdraw the money.
  • State and local income tax may also explore to CD interest, depending on where you live and where the bank is located.

How your tax bracket affects what you pay on CD interest

Your tax rate on CD interest depends on your tax bracket — which is determined by your total income for the year and your filing status. If you earn $50,000 in wages and $1,000 in CD interest, your tax bracket is based on $51,000 total income. The CD interest does not get its own separate, lower rate.

For 2024, federal tax brackets range from 10% to 37%. If you are in the 22% bracket, you will owe 22% federal tax on your CD interest. If you are in the 35% bracket, you will owe 35%. The higher your total income, the higher the rate applied to the CD interest.

This matters most if you have a large CD or multiple CDs earning significant interest. A $50,000 CD earning 4.5% annually generates $2,250 in interest. If you are in the 24% bracket, that costs you $540 in federal tax alone. State tax can add another 3% to 10% depending on where you live.

When CD interest is earned versus when you pay tax on it

CDs work differently from bonds or some other investments because the interest is usually credited to your account automatically. Most banks add interest monthly, quarterly, or at maturity. The moment the bank credits that interest — even if you do not touch it — you have earned taxable income.

This creates a timing issue with CDs that mature in less than a year. If you buy a 6-month CD in November and it matures in May, the interest earned in November and December counts on your current-year tax return. The interest earned in January through May counts on next year's return. You do not get to choose when to report it.

For longer-term CDs, the same rule applies each year. A 5-year CD that earns interest annually will generate a Form 1099-INT every single year, and you report that interest every year — even though you cannot access the money without paying an early withdrawal penalty.

Tax-deferred CDs and what happens inside retirement accounts

If you hold a CD inside a traditional IRA or 401(k), the interest is not taxed when it is earned. Instead, you pay tax on the entire withdrawal amount when you take money out in retirement. This is one reason people use retirement accounts for CDs — the interest compounds without being reduced by annual taxes.

A Roth IRA works differently. CD interest inside a Roth IRA is never taxed, as long as you follow the withdrawal rules. You can let the interest compound for decades tax-free, and may have access to withdrawals come out with no tax bill at all.

Regular CDs held in a taxable brokerage account or savings account do not get this treatment. The interest is taxed every year, no matter how long you hold the CD.

State and local taxes on CD interest

In addition to federal tax, most states tax CD interest as ordinary income. Your state tax rate varies: some states have no income tax at all (like Florida, Texas, and Wyoming), while others tax interest at rates between 3% and 13%.

A few states offer limited breaks. Some exempt interest income for people over a certain age, or cap the tax rate on interest. Check your state's tax rules or speak with a tax professional to understand what applies to you.

Local taxes are less common but do exist in some cities and counties. New York City, for example, taxes interest income. If you live in a place with both state and local income tax, CD interest is subject to both.

Reporting CD interest on your tax return

The process is straightforward. Your bank sends you Form 1099-INT by January 31. This form shows the total interest you earned from all CDs and savings accounts at that bank during the year. If you have CDs at multiple banks, you will receive a separate 1099-INT from each one.

You add up all the 1099-INT forms and report the total on your tax return. On the federal form, this goes on Schedule 1 (Form 1040), line 8b. The amount then flows into your total income calculation.

If your total interest income is less than $1,500, you may be able to report it directly on Form 1040 without using Schedule B. If it is $1,500 or more, you must use Schedule B to list each source. Either way, the interest counts as ordinary income.

What happens if you withdraw a CD early

Early withdrawal from a CD usually triggers a penalty, but that penalty does not change how the interest is taxed. You still owe tax on all the interest you earned up to the withdrawal date, even though you pay a penalty for taking the money out.

The bank reports the interest on Form 1099-INT as usual. The penalty is reported separately on Form 1099-OID or noted on the 1099-INT itself. You deduct the penalty on your tax return (on Schedule 1, line 21), which reduces your taxable income slightly, but you still pay tax on the full interest amount.

This is why it matters to understand CD terms before you buy. If you think you might need the money, the tax cost of early withdrawal includes both the penalty and the tax bill on the interest you earned.

Frequently Asked Questions

Do I have to pay tax on CD interest if I do not withdraw the money?

Yes. Tax is owed in the year the interest is credited to your account, regardless of whether you withdraw it. The bank reports it on Form 1099-INT, and you report it on your tax return. Leaving the money in the CD does not defer the tax.

What if my CD interest is less than $10?

You still owe tax on it. There is no minimum threshold for reporting interest income. However, if your total interest from all sources is under $1,500, you may report it directly on Form 1040 without using Schedule B.

Is CD interest taxed differently than interest from a savings account?

No. Both are taxed as ordinary income at your regular tax rate. The only difference is that CDs often pay higher interest rates, so the tax bill is usually larger. The tax treatment is identical.

Can I avoid taxes on CD interest by buying a CD in a different state?

No. You owe federal tax on CD interest regardless of where the bank is located. State tax depends on where you live, not where the bank is. If you live in a state with income tax, you owe that tax on CD interest earned anywhere.

What if the bank does not send me a 1099-INT?

Contact the bank and ask for it. Banks are required to send 1099-INT forms by January 31 for any account that earned $10 or more in interest during the year. If you do not receive one by early February, follow up. You still owe tax on the interest even if the form is delayed.