A certificate of deposit, or CD, can be a good place to invest cash you won't need for a while, such as money for college or grad school. You'll tie up your funds for a determined period, usually between six months and five years, but you'll earn higher interest than you would on most savings accounts. In many cases, however, you must claim the interest on your federal taxes even before you cash your CD.
Regardless of whether or not you make the decision to cash in your CD, you are required to report all interest which you have earned from it throughout the year.
You Must Report CD Interest Annually
If you buy a six-month CD in January and cash it during the same year, there's no surprise. You'll get your interest before the end of the year and claim it on your federal taxes for the year you receive it. However, if you have CD with a maturity greater than one year, you must report the interest earned every year, according to the Internal Revenue Service. This rule applies to any type of savings certificate or time deposit at banks and other savings institutions.
You'll usually have to pay a penalty if you want to touch your original investment in a CD before the account matures. However, banks typically allow you to withdraw the interest from CDs as soon as it's credited without any penalty. In general, the IRS considers that you've already received any interest that's been added to your account and that you can withdraw it without penalty. It doesn't make any difference whether or not you actually take it out.
The IRS requires savings institutions to report interest yearly on CDs that have terms of longer than a year. However, sometimes banks may report interest on a yearly basis for shorter CDs. If the bank allows you to withdraw interest without a penalty, it's normally taxable, even before maturity. Otherwise, you'll have to claim the amount on your 1099-INT on your taxes. Prevent unpleasant surprises by finding out your bank's policy on reporting interest before you open a CD.
Taxes on CD Interest
You normally won't have trouble figuring out how much CD interest to claim on each year's income tax. The IRS requires every savings institution to send you a Form 1099-INT listing the taxable interest on your CDs and other accounts. These forms normally arrive after the end of the tax year in January or early February. The IRS also receives a copy. Save your 1099-INT forms for tax filing time. However, you must claim any taxable interest even if a 1099 fails to arrive. Contact your bank to ask for a copy.
Interest income is taxed as ordinary income, which is one of the CD and savings account tax considerations you'll need to keep in mind when determining where to save your money. Your CD tax rate will depend upon your tax bracket.
Filing Paperwork for the 2018 Tax Year
The 2018 tax forms are not yet released, as the IRS is still revising them to reflect the changes made by the Tax Cuts and Jobs Act. Whether you will need to file a certain type of Form 1040 (1040, 1040A or 1040EZ) based upon how much interest income you receive is not yet known; the new Form 1040 is simplified.
Filing Paperwork for the 2017 Tax Year
In most cases, you can report your CD and other interest income on IRS Form 1040, 1040A or 1040EZ. For the 2017 tax year, f you have more than $1,500 in interest from all sources, however, you must choose either Form 1040 or 1040A. You must also complete Schedule B, the Interest and Ordinary Dividends form, listing CD and other interest income under line 1.
- U.S. Securities and Exchange Commission: High-Yield CDs -- Protect Your Money by Checking the Fine Print
- IRS: Interest Income
- IRS: Schedule B
- IRS: Publication 550 (2017), Investment Income and Expenses
- IRS: IRS Working on a New Form 1040 for 2019 Tax Season
- IRS: Draft 2018 Form 1040
- IRS. "Topic No. 403 Interest Received." Accessed Feb. 18, 2020.
- IRS. "Topic No. 559 Net Investment Income Tax." Accessed Feb. 18, 2020.
- IRS. "Traditional and Roth IRAs." Accessed Feb. 18, 2020.