Yes, you owe federal income tax on all CD interest, and most states tax it too
Interest earned on a certificate of deposit (CD) is taxable income. The IRS treats it the same way it treats interest from a savings account or money market fund — you report it on your tax return and pay income tax at your ordinary rate, which depends on your total income for the year. There is no exemption for CDs, no matter how short the term or how small the amount.
Most states also tax CD interest as part of your state income tax, with a few exceptions. If you live in a state with no income tax — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming — you owe federal tax only. If you live elsewhere, check your state's rules, because some states have special treatment for retirement accounts or residents over a certain age, but the CD interest itself is still taxable in most cases.
Key Takeaways
- CD interest is reported on IRS Form 1099-INT, which your bank sends you by January 31 each year if the interest exceeds $10.
- You owe tax on the interest even if you do not withdraw the money before the CD matures.
- The tax rate depends on your total income for the year and your filing status, not on the CD rate itself.
- Some states do not tax CD interest for residents over 59½ or for interest earned in retirement accounts, so check your state's rules.
- If you expect to owe more than $1,000 in taxes for the year, you may need to make quarterly estimated tax payments to avoid a penalty.
How the IRS knows about your CD interest
Your bank or credit union reports CD interest to the IRS on a Form 1099-INT. They send you a copy by January 31 each year if you earned $10 or more in interest during the previous year. The form shows the exact amount of interest paid, and you must report that same amount on your tax return.
The IRS receives a copy of the 1099-INT directly from your bank, so they know what you earned even if you do not report it. Failing to report CD interest is a common audit trigger, especially if you have multiple CDs or high balances. The penalty for underreporting income can be steep — typically 20 percent of the unpaid tax, plus interest.
When you owe tax on CD interest you have not withdrawn yet
You owe income tax on CD interest in the year it is earned, even if the money stays in the CD and you do not touch it until maturity. This is called accrual-basis taxation. If you buy a three-year CD on January 1 and it earns $150 in the first year, you owe tax on that $150 in year one, regardless of whether you withdraw it.
The only exception is a CD held in a tax-deferred account — an IRA, 401(k), or similar retirement plan. Interest earned inside those accounts is not taxed until you withdraw the money in retirement. If your CD is in a regular taxable account, the interest is taxable every year.
How much tax you owe on CD interest
The tax rate depends on your marginal tax bracket, which is determined by your total income for the year and your filing status. CD interest is added to your other income — wages, self-employment income, capital gains, and so on — and taxed at the rate that applies to your highest dollar of income.
If you are in the 22 percent federal tax bracket, you owe 22 percent of your CD interest in federal tax. If you are in the 12 percent bracket, you owe 12 percent. The brackets change each year, and they depend on whether you file as single, married filing jointly, head of household, or another status. Your state tax rate, if you live in a state with income tax, is added on top of the federal rate.
A straightforward example: if you earn $500 in CD interest and you are in the 22 percent federal bracket, you owe $110 in federal tax on that interest alone. If your state tax rate is 5 percent, you owe another $25, for a total of $135.
State taxes on CD interest
Eight states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax income at all, so residents owe no state tax on CD interest. Every other state taxes it as ordinary income, with a few narrow exceptions.
Some states exempt interest income for residents over a certain age, usually 59½ or 65. A few states exempt interest earned in retirement accounts. Illinois and Mississippi exempt interest from certain bonds, but not from CDs. Check your state's tax agency website or ask a tax preparer whether your situation qualifies for any exemption — the rules vary widely and change periodically.
What to do if you owe more tax than expected
If your CD interest pushes your total tax bill above what you have already paid through withholding or estimated payments, you have two options: pay the balance when you file your return, or make quarterly estimated tax payments to spread the cost across the year.
If you expect to owe $1,000 or more in federal tax for the year, the IRS prefers that you make estimated payments in April, June, September, and January. Missing these payments can result in an underpayment penalty, even if you pay the full amount by April 15. Use IRS Form 1040-ES to calculate what you owe each quarter.
If you owe less than $1,000, you can straightforward pay the full amount with your tax return. Many people do this and face no penalty.
Strategies to reduce taxes on CD interest
You cannot avoid the tax, but you can reduce it by holding CDs in tax-advantaged accounts. A traditional IRA or SEP-IRA lets you earn CD interest tax-deferred until you withdraw the money in retirement. A Roth IRA lets you earn it tax-free if you follow the withdrawal rules. A 401(k) or similar workplace plan also shelters CD interest from annual taxation.
If you have a large amount to invest and want to minimize taxes, consider splitting it across multiple accounts — your own IRA, a spouse's IRA, and a taxable account — rather than putting everything in one taxable CD. The tax savings depend on your bracket and how much interest you earn, so it is worth running the numbers with a tax preparer if you have significant CD holdings.
Another option is to buy CDs that mature in a later tax year. If you buy a CD in December that does not mature until the following January, the interest is taxed in the year it is earned, not the year you buy it. This does not save you money overall, but it can shift the tax bill to a year when your income is lower.
Frequently Asked Questions
Do I have to report CD interest if it is less than $10?
Your bank does not have to send you a 1099-INT if you earned less than $10, but you still owe tax on it. You must report all CD interest on your return, no matter how small. The IRS does not have a minimum threshold for taxable income.
What if I have CDs at multiple banks?
Each bank sends you a separate 1099-INT for the interest earned at that institution. You add up all the 1099-INTs and report the total on your tax return. The IRS receives copies from each bank, so they know your total CD interest across all accounts.
Can I deduct CD losses from my taxes?
If a CD loses value — which is rare and usually happens only if you sell it early — you cannot deduct the loss. CDs are not treated as investment securities for tax purposes. You owe tax on the interest earned, period, regardless of whether the CD itself lost money.
Do I owe tax on CD interest earned in a Roth IRA?
No. Interest earned inside a Roth IRA is not taxed in the year it is earned, and if you follow the withdrawal rules, it is never taxed. You do not report it on your annual tax return. The same is true for traditional IRAs and other may have access to retirement accounts.
What happens if I do not report CD interest on my taxes?
The IRS will likely catch it, because your bank reports it on a 1099-INT that goes to the IRS as well. You will owe the tax plus interest on the unpaid amount, and you may face a penalty of 20 percent or more of the unpaid tax. It is much cheaper to report it correctly the first time.