Cassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying of.
Cassidy Horton Personal Finance Reviewer and WriterCassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying of.
Written By Cassidy Horton Personal Finance Reviewer and WriterCassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying of.
Cassidy Horton Personal Finance Reviewer and WriterCassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying of.
Personal Finance Reviewer and Writer Michael Benninger Managing EditorWith more than 15 years of experience crafting content about all aspects of personal finance, Michael Benninger knows how to identify smart moves for your money. His work has been published by Intuit, Insider and the Los Angeles Times, and he's been.
Michael Benninger Managing EditorWith more than 15 years of experience crafting content about all aspects of personal finance, Michael Benninger knows how to identify smart moves for your money. His work has been published by Intuit, Insider and the Los Angeles Times, and he's been.
Michael Benninger Managing EditorWith more than 15 years of experience crafting content about all aspects of personal finance, Michael Benninger knows how to identify smart moves for your money. His work has been published by Intuit, Insider and the Los Angeles Times, and he's been.
Michael Benninger Managing EditorWith more than 15 years of experience crafting content about all aspects of personal finance, Michael Benninger knows how to identify smart moves for your money. His work has been published by Intuit, Insider and the Los Angeles Times, and he's been.
Updated: Sep 10, 2024, 12:20pm
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A certificate of deposit (CD) is a type of savings vehicle that pays a fixed interest rate over a set term, typically ranging from a few months to several years. While many people think of CDs as low-risk investments, one aspect isn’t often mentioned: taxes.
Interest earned on CDs is taxed as ordinary income at your individual federal income tax rate. This rate can range from 10% to 37% depending on your taxable income and filing status. (Not sure what your taxable income is? Use this income tax calculator to find out.)
In addition to federal income taxes, you may also be subject to state and local taxes on your CD interest, depending on the laws in your state. Some states do not tax interest income at all, while others have a flat or tiered tax rate.
CDs held in a tax-advantaged account, such as an individual retirement account (IRA), may be exempt from taxes until you withdraw the funds.
You typically pay taxes on a CD in the year you earn the interest payments. It doesn’t matter if your CD hasn’t matured yet or if don’t have access to the funds. Taxes are still due in the year interest posts to your account.
For example, if you have $10,000 invested in a two-year CD with a 3.00% APY, you’ll earn $300 in interest during the first year and $318.34 in interest during the following year. Even if your interest is off-limits until maturity, you’ll still pay taxes in the year you earned it.
The answer depends on whether you have a traditional or Roth IRA CD. With a traditional IRA CD, withdrawals made after age 65 are still considered taxable income and must be reported accordingly when filing taxes. Withdrawals taken from a Roth IRA CD after age 65 do not have to be reported as taxable income since contributions were made with after-tax dollars. In other words, the interest you earn is tax-free.
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On Discover's WebsiteIf you earn at least $10 in interest for the year, banks are required by law to report this information to the IRS using Form 1099-INT. You also get a copy of this form for your tax records.
Most banks issue Form 1099-INT by January 31st of each year and send you a copy for your tax records. If you have multiple CDs or interest-bearing accounts, you may receive multiple copies of Form 1099-INT, one for each account.
Even if you don’t receive Form 1099-INT, you’re required to report all interest of $10 or more (including tax-exempt interest) to the IRS. When you file your tax return, you’ll report this interest on Form 1040 Line 2.
One way to avoid paying taxes on CD interest is to purchase CDs in a tax-advantaged account, such as an IRA or a 401(k). The interest earned on CDs in these accounts is typically not taxed until you make a withdrawal, which is usually during retirement.
While these strategies can help reduce or avoid taxes on CD interest, keep in mind that they may also have restrictions or eligibility requirements. If you’re not sure if a retirement CD is right for you, consult a financial advisor or tax professional first.
The taxes on CDs are similar to those on other types of interest income, such as interest earned on bonds. Both are considered taxable income and subject to federal income tax, which is based on your marginal tax bracket.
However, there are some investments, such as stocks and mutual funds, which are taxed differently. Capital gains from the sale of stocks or mutual funds are taxed at a lower rate than ordinary income (if held for more than a year). This makes them more tax efficient than CDs in some cases.
It’s also important to note that some investments, such as real estate, may be subject to additional taxes, such as property taxes, that don’t apply to CDs.
Knowing how CDs are taxed can help you decide if they’re the right investment strategy for you. But for the most part, they’re taxed as ordinary income, similar to the interest you earn on money in your savings account. If you have questions about taxes on CDs or how they apply to your individual situation, consult a financial advisor or tax professional
Yes, in most cases you have to pay taxes on CDs. One exception is if you have an IRA CD, which is funded with after-tax dollars. Explore the best IRA CD rates to learn more.
The amount of taxes you pay on a CD depends on your tax bracket, which is based on your taxable income and filing status for the year.
Yes, you pay CD interest in the year it’s earned, regardless of whether your CD has matured. Your bank will issue Form 1099-INT each year, indicating how much interest you earned for that year.
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Personal Finance Reviewer and WriterCassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying off $18,000 in debt within 10 months of graduating college. She later went on to triple her salary in two years by ditching her 8-to-5 job to write for a living.
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