Taxes on an inherited CD come down to a single split: the money the original owner deposited passes to you tax-free, but the interest the CD earns is taxable. Interest that accrued before the owner’s death is generally handled through the estate or the decedent’s final return, and interest that accrues after the date of death is yours to report at your ordinary income tax rate.1Internal Revenue Service. Gifts and Inheritances
That’s the short version. The rest depends on when the interest was earned, what kind of account the CD was held in, and, for a small number of estates, whether federal estate tax was paid on the interest before it reached you.
The Principal Is Not Taxed
The IRS does not treat inheritances as income.1Internal Revenue Service. Gifts and Inheritances If the original owner deposited $50,000 into a CD, that $50,000 comes to you tax-free regardless of how the account was titled or how long ago it was opened. Only the interest is in play, and this rule applies to standard bank CDs held outside a retirement account. CDs inside a traditional IRA follow different rules, addressed further down.
Interest Earned Before the Owner’s Death
Interest that built up between the CD’s last interest payment date and the date the owner died belonged to the deceased. The tax code calls this “income in respect of a decedent,” usually shortened to IRD.2Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators Responsibility for reporting it falls on one of three parties: the estate itself, a beneficiary who directly receives the right to that income, or anyone the estate later passes that right to.3Office of the Law Revision Counsel. 26 US Code 691 – Recipients of Income in Respect of Decedents
In practice, the executor usually handles this by reporting the pre-death interest either on the decedent’s final Form 1040 or on Form 1041, the estate’s income tax return. If instead the estate passes that pre-death interest straight to you before reporting it, you include it in your own gross income for the year you receive it.3Office of the Law Revision Counsel. 26 US Code 691 – Recipients of Income in Respect of Decedents
Interest Earned After the Owner’s Death
Everything the CD earns starting the day after the owner’s death is yours for tax purposes. The IRS puts it plainly: interest earned after death “isn’t income in respect of a decedent, but is taxable income includible in the income of the respective recipients.”2Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators
The bank will treat you as the new owner from that date forward. If post-death interest totals $10 or more for the year, you’ll receive a Form 1099-INT showing the amount in Box 1. You pay tax on that interest at your ordinary income tax rate, the same rate that applies to your wages.
Most banks waive the early withdrawal penalty when the account holder dies, so cashing out the CD is usually an option, though this is bank policy rather than federal law. If you keep the CD until maturity, every dollar of interest that accrues from the date of death forward is yours to report each year, even if you don’t touch the money until the term ends.2Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators
How to Report the Interest on Your Return
Post-death interest goes on your Form 1040 the same way any other bank interest does, using the amount shown in Box 1 of the 1099-INT. If your total interest income for the year exceeds $1,500, you also file Schedule B.4Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends
You owe tax on the interest whether or not a 1099-INT arrives. Banks aren’t required to issue the form if post-death interest was under $10, but the reporting duty still applies. Keep your own record of the date you took ownership and the interest that accrued afterward. If the 1099-INT lumps pre-death and post-death interest together, coordinate with the executor to divide the amounts between the estate’s return and yours.
The bank will also ask for your Social Security number to set up tax reporting in your name, usually through a Form W-9. Skipping that step triggers backup withholding on your interest payments.5Internal Revenue Service. Instructions for the Requester of Form W-9
If the CD Was Held Inside a Traditional IRA
An IRA CD is a very different animal. With a regular bank CD, only the interest is taxable. With a traditional IRA CD, the entire distribution is taxable as ordinary income, principal included, because the original owner funded the account with pre-tax dollars.
A beneficiary generally reports distributions from an inherited IRA the same way the original account holder would have.6Internal Revenue Service. Retirement Topics – Beneficiary For a traditional IRA, the full amount you withdraw counts as income. Inherit a $50,000 IRA CD, take the whole thing in one year, and $50,000 lands on your tax return. The 10% early withdrawal penalty doesn’t apply to inherited IRA distributions regardless of your age, but income tax does.
How fast you have to empty the account depends on your relationship to the deceased and when they died. Spouses have the most flexibility, including rolling the IRA into their own account. Most non-spouse beneficiaries have to withdraw the full balance within ten years. Because every dollar is taxable, spreading withdrawals across several years can keep you in a lower bracket. If you’re not sure whether you inherited a plain CD or an IRA CD, find out before you take a distribution.
The IRD Deduction for Large Estates
If the estate was large enough to owe federal estate tax and some of that tax was attributable to the pre-death CD interest, you may be able to claim an income tax deduction for the estate tax paid on that interest. The deduction exists to keep the same dollars from being taxed twice, once in the estate and again as income to you.2Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators
For individual beneficiaries, this is an itemized deduction on Schedule A of Form 1040.2Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators The federal estate tax exemption is very high (the basic exclusion is $15,000,000 per individual for 2026), so this only comes into play for a small number of estates.7Internal Revenue Service. Whats New – Estate and Gift Tax If the executor filed a Form 706, ask whether any estate tax was allocated to the CD interest you received.
State Inheritance Tax
Federal income tax on interest is the main issue for most beneficiaries, but five states impose a separate inheritance tax paid by the beneficiary rather than the estate: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates range from 0% to 16%, and all five give closer relatives lower rates or full exemptions. Surviving spouses are typically exempt entirely; distant relatives and unrelated beneficiaries face the highest rates. If the deceased lived in one of those states, check that state’s exemptions and rate schedule.
How the CD Was Titled
The way the CD was held affects how quickly you can access the money and whether it passes through probate, but it generally doesn’t change the income tax rules above.
- A payable-on-death (POD) designation transfers the CD directly to you outside probate. You present a death certificate and identification, and the funds become yours. The full value is still included in the decedent’s estate for estate tax purposes.
- Joint tenancy with right of survivorship means the CD becomes solely yours when the other owner dies. During joint ownership, each tenant generally reports an equal share of the interest; after the other owner’s death, all interest going forward is yours.
- With no beneficiary designation, the CD passes through the estate. The executor controls it until probate is settled, which can delay access by months, and some post-death interest may be reported on Form 1041 before the balance reaches you.