CD interest is taxed as ordinary income in the year you earn it, even if you don't withdraw the money

When you buy a certificate of deposit (CD), the bank pays you interest. That interest counts as ordinary income on your tax return, which means it's taxed at your regular income tax rate — the same rate as wages or salary. The IRS doesn't care that your money is locked up; they tax the interest the year it accrues, not the year you cash out.

This applies to all CDs: traditional CDs, high-yield CDs, jumbo CDs, and promotional CDs. The only exception is a CD held inside a tax-advantaged account like a traditional IRA or Roth IRA, where different rules apply to the entire account.

The bank will send you a Form 1099-INT in January showing how much interest you earned. You report that amount on your tax return, and you owe federal income tax on it. If you live in a state with income tax, you'll owe state tax on it too.

Key Takeaways

  • CD interest is taxed as ordinary income at your regular tax rate, regardless of how long the CD term is or whether you withdraw the money.
  • The bank reports your interest on Form 1099-INT, which you must include on your tax return even if the amount is small.
  • You owe tax on the interest in the year it accrues, not in the year you cash out the CD.
  • CDs held in IRAs or other retirement accounts follow different tax rules that depend on the account type, not the CD itself.
  • If your CD interest is very small, you may still owe tax on it, but you won't receive a 1099-INT unless it exceeds $10.

When you owe tax on CD interest

The timing of when you owe tax depends on how the CD is structured. Most CDs compound interest daily or monthly and add it to your balance. That accrued interest is taxable in the year it's added, even though you can't touch the money until the CD matures.

If you have a one-year CD earning $500 in interest, you owe tax on that $500 in the year the interest accrues — not when you withdraw it a year later. This is true even if you immediately roll the CD into a new one without taking the money out.

The exception is a CD with a maturity date more than one year away that doesn't pay interest until maturity. These are rare, but if you have one, you report the interest in the year the CD matures, not each year it's outstanding.

How much tax you'll owe on CD interest

The amount of tax depends on your total income and your tax bracket. CD interest is added to your other income (wages, investment income, retirement distributions, and so on) to determine your tax bracket. If you're in the 22% federal tax bracket, you'll owe roughly 22% of your CD interest in federal tax, plus any applicable state income tax.

This is different from capital gains, which may be taxed at lower rates. CD interest has no preferential rate — it's treated the same as ordinary wages.

Example: If you earn $60,000 in wages and $1,200 in CD interest, your taxable income is $61,200. That extra $1,200 is taxed at whatever your marginal rate is at that income level. If you're in the 22% bracket, you owe roughly $264 in federal tax on the CD interest alone.

Reporting CD interest on your tax return

The bank will send you a Form 1099-INT if your interest exceeds $10 in a calendar year. You receive it by January 31. The form shows the total interest earned and the account number.

You report this amount on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest income, or directly on Form 1040 if you have less. If you use tax software, it will walk you through entering the 1099-INT information.

If your CD interest is less than $10, the bank won't send a 1099-INT, but you still owe tax on it. You'll need to track it yourself and report it on your return.

CDs in retirement accounts work differently

If you hold a CD inside a traditional IRA, the interest is not taxed while the money is in the account. You don't owe tax until you withdraw money from the IRA, at which point the entire withdrawal (including the CD interest) is taxed as ordinary income.

If you hold a CD inside a Roth IRA, the interest is never taxed, as long as you follow the Roth withdrawal rules. may have access to withdrawals from a Roth are tax-free, including all the interest your CD earned.

The CD itself doesn't determine the tax treatment — the account type does. A regular CD at a bank is always taxed annually. A CD inside an IRA follows IRA tax rules.

Strategies to reduce taxes on CD interest

Because CD interest is taxed as ordinary income, there's no tax-advantaged way to earn it outside of a retirement account. You can't use tax-loss harvesting or other strategies that work with investments.

The main options are: hold CDs in an IRA or other retirement account if you have contribution room; spread CD purchases across multiple people (a spouse's CD interest is reported separately); or accept that the interest is taxable and factor the after-tax return into your decision about whether a CD is worth it compared to other savings options.

Some people use CDs as part of a ladder strategy — buying multiple CDs with different maturity dates so money becomes available at regular intervals. This doesn't reduce taxes, but it can help you manage cash flow without locking all your money up for a long term.

State income tax on CD interest

Most states tax CD interest as ordinary income, just like the federal government does. A few states don't have income tax (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming), so residents of those states owe only federal tax on CD interest.

If you live in a state with income tax and earn CD interest, you'll report it on your state return as well. The amount is usually the same as what you report to the IRS, though some states have different rules for certain types of income.

Frequently Asked Questions

Do I owe tax on CD interest if I don't withdraw the money?

Yes. You owe tax on CD interest in the year it accrues, even if the money stays in the CD and you don't touch it. The IRS taxes accrued interest, not withdrawn interest. This is one reason to factor taxes into your CD strategy — the after-tax return may be lower than the advertised rate.

What if my CD interest is less than $10?

You still owe tax on it, but the bank won't send a 1099-INT. You need to track the interest yourself and report it on your tax return. Check your CD statements or ask the bank for the exact amount if you're unsure.

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

No. Both are taxed as ordinary income in the year earned. The only difference is the interest rate — CDs typically pay more. The tax treatment is the same.

Can I avoid taxes by cashing out a CD early?

No. You'll owe taxes on the interest regardless of when you withdraw it. You may also pay an early withdrawal penalty, which is a separate cost. The tax is owed in the year the interest accrued, not the year you withdraw.

How do I report CD interest if I didn't get a 1099-INT?

If the interest was less than $10, the bank won't send a form. You still report it on Schedule B or Form 1040, depending on your total interest income. Use your CD statements or contact the bank to confirm the exact amount.