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- CD interest earned for the year must be included in your tax return as ordinary income.
- If you paid an early withdrawal penalty on a CD, that will factor into how much you report.
- CD interest likely won't have a big impact on your taxes, unless your balance is large.
The best CD rates are well over 5% right now, so it could be a great time to open an account. But with such high interest rates, you may be wondering: Do you have to pay taxes on what you earn?
Although a certificate of deposit offers a great way to earn interest, know that any interest earned on bank accounts is taxable. Here's what you need to know about reporting interest on CDs so you're prepared for tax season.
Is CD interest taxable?
Interest earned from CDs held at a bank or in a standard brokerage account is taxed as ordinary income, the same as income you earn from a W-2 employer. The exact tax rate you'll pay depends on which tax bracket you're in, and it can vary from year to year.
Current federal income tax rates range from 10% to 37%. To figure out which tax bracket you're in, you'll have to add up your salaries, wages, bonuses, interest income, and tips. Then, you'll have to see if there are any deductions you qualify for.
If you withdrew money from your CD before the term ended and paid an early withdrawal penalty, that will also be a factor in the amount you pay taxes on. The early withdrawal penalty will be deducted from your total earnings for the year. For example, if you paid a $50 withdrawal penalty and earned $100, the amount that will be taxed is $50.
How is CD interest taxed?
You have to pay taxes on CD interest by the tax deadline in April each year. Otherwise, you may have to pay a penalty.
You're responsible for reporting interest earned on a CD every year, even if your CD has not matured yet. For example, if you had a 5-year CD, you would include interest earned in your tax return each year, not at the end of the 5-year term.
You should receive a 1099-INT form from your bank by January 31 if you earned more than $10 in interest. If you do not receive a 1099-INT form, you'll still have to report the interest earned on a CD.
You could check your account to review your online bank statements or contact your financial institution to request this information.
Deductions and credits for CD interest
If you tap into your CD early, you'll usually be charged an early withdrawal fee. These can range anywhere from 30 days to six months' worth of interest, depending on your CD term.
The good news is that the penalty is deductible on your federal tax return, and potentially your state return. Follow the instructions on the IRS form or your tax software program.
Tax tips for CD investors
Keep track of your 1099-INTs
If you have multiple CDs and savings accounts, you will need to keep track of earnings in each one to report on your annual tax return. Financial institutions are required to send customers a record of their earnings via form 1099-INT by January 31 each year.
Consider tax-advantaged accounts
CDs can be a useful tool in retirement accounts like IRAs and 401(k)s. These accounts shelter your interest and investment earnings from taxes in the current year, deferring them to the year you take a distribution from the account.
If you put money into a CD in a tax-advantaged account, you aren't required to report and pay interest annually — but you also can't collect it. Instead, the interest is reinvested in your account. When you make a withdrawal in retirement, it will be taxed as ordinary income.
Consult a tax professional for advice
CDs will likely not have a big impact on your taxes. "If you're putting in $1,000, it's not going to have a huge impact. But if you're putting in bigger amounts, it might affect your marginal tax rates a little bit," says Elizabeth Plot, a CFP professional and the founder of Primas Financial Planning.
"I would recommend that that individual contact their tax professional if they have any concerns, especially if they're planning to invest a larger amount," Plot says.
CD taxes FAQs
Yes, you have to pay taxes on traditional CDs, even if you don't get a 1099-INT from your financial institution. You could pay a penalty from the IRS if you don't report it in the year it was earned.
You still need to report interest earned to the IRS, even if you don't receive a form from your financial institution. Check your account statements to see if there is a breakdown of interest earned by year.
You can avoid annual tax on CD interest if you open a CD through a tax-advantaged account, like an IRA. When you open an IRA, you can invest money in different options, like stocks, bonds, or even CDs. If you get a CD this way, you'll pay taxes when you make a withdrawal.
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