Interest on a certificate of deposit is taxed as ordinary income at your federal marginal rate, the same way wages are taxed, with no preferential rate like the one that applies to long-term capital gains or qualified dividends. Your bank reports the interest to you and the IRS each year, and when you actually owe the tax depends on how long the CD runs.
Ordinary Income at Your Marginal Rate
The IRS classifies interest from bank accounts, money market accounts, and certificates of deposit as taxable interest income.1Internal Revenue Service. Topic No. 403, Interest Received It gets added to your other income and taxed at your marginal rate. For 2026, federal rates range from 10% on the first $12,400 of taxable income for single filers up to 37% on income above $640,600. For married couples filing jointly, the top bracket begins at $768,700.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
State and local income taxes usually apply on top. Even states that exempt interest on U.S. Treasury obligations generally still tax interest on bank deposits, so the combined bite can be meaningful in a higher bracket.
When You Owe the Tax
The maturity of the CD determines when the interest hits your return, and the rules split at the one-year mark.
CDs Maturing in One Year or Less
For a CD that matures within one year and pays all its interest in a lump sum at maturity, you report the whole amount in the year the CD matures.3Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses The rule behind this is “constructive receipt,” which treats income as taxable when it’s credited to your account and available to you without a substantial penalty.4eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income Rolling the money into a new CD doesn’t defer the tax. Once the interest was available to you at maturity, it counts as received, whether you cashed out or reinvested.
CDs Maturing in More Than One Year
Longer CDs are treated as original issue discount (OID) instruments. You owe tax on a portion of the interest every year, even if you won’t actually see any money until the CD matures.3Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses A five-year CD generates taxable income in each of the five years. Locking the money up doesn’t push the tax bill to the end.
Some longer CDs credit interest annually or let you pull accrued interest each year without penalty. In that case constructive receipt applies as well: the interest is taxable in the year it becomes available, whether you withdraw it or leave it in.
How Your Bank Reports It
Your bank or credit union files a copy of your interest report with the IRS, so what you put on your return needs to match.
Form 1099-INT
Most CDs generate a Form 1099-INT if the account earned at least $10 in interest for the year.5Internal Revenue Service. About Form 1099-INT, Interest Income Financial institutions must furnish the form by January 31 for the prior tax year.6Internal Revenue Service. General Instructions for Certain Information Returns (2025) Box 1 shows total taxable interest. A mismatch between what the bank reports and what you file can trigger an automated notice.
Form 1099-OID
For a CD with a maturity of more than one year issued after 1970, the bank may issue Form 1099-OID instead of, or alongside, Form 1099-INT.7Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID The institution can combine stated interest and OID on one form or split them across both. Report the totals shown.
Under $10, or No Form at All
If your CD earned less than $10, you probably won’t receive a 1099. You still have to report the interest. The IRS requires you to include all taxable interest on your return, whether or not a form was issued.1Internal Revenue Service. Topic No. 403, Interest Received
Schedule B
If your total taxable interest from all sources tops $1,500 for the year, file Schedule B with your Form 1040.8Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends Schedule B lists each payer and the amount received. CDs at multiple banks each get their own line.
Early Withdrawal Penalties Are Deductible
Cashing out a CD before maturity usually costs you a penalty in forfeited interest. That penalty is deductible, and the deduction is more generous than most people expect.
It’s an above-the-line adjustment, which reduces your adjusted gross income directly. You don’t need to itemize to claim it. The bank reports the penalty in Box 2 of Form 1099-INT, and you enter it on Schedule 1.9Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID
The deduction isn’t capped at the interest you earned. If you broke the CD early enough, the penalty can exceed the interest credited. You still report the full interest as income and deduct the full penalty. If a CD earned $300 in interest but the early withdrawal penalty was $450, you report $300 in interest and deduct the full $450, and the $150 difference offsets other income.10Internal Revenue Service. IRS Courseware – Case Study 1: Form 1099-INT or Form 1099-OID
The 3.8% Net Investment Income Tax
Higher earners owe an additional 3.8% on CD interest through the Net Investment Income Tax. The surtax kicks in when modified adjusted gross income exceeds:11Internal Revenue Service. Topic No. 559, Net Investment Income Tax
- $200,000 for single filers or head of household
- $250,000 for married filing jointly
- $125,000 for married filing separately
Interest is expressly included in net investment income.12Internal Revenue Service. Questions and Answers on the Net Investment Income Tax The 3.8% applies to the smaller of your net investment income or the amount by which your MAGI exceeds the threshold. A single filer with $220,000 in MAGI and $30,000 in investment income would owe the 3.8% on $20,000, not the full $30,000. Stacked on top of the 37% ordinary bracket, the highest earners face an effective federal rate of 40.8% on CD interest. The NIIT thresholds are not indexed for inflation.
CDs Held Inside Retirement Accounts
A CD held in a traditional IRA or 401(k) doesn’t generate an annual 1099-INT and doesn’t create a yearly tax bill on the interest. The interest grows tax-deferred, and you owe ordinary income tax only when you take distributions in retirement. Distributions before age 59½ typically add a 10% additional tax on top of the income tax.
In a Roth IRA, qualified distributions come out tax-free, so CD interest earned inside the account can escape federal income tax entirely. The account must be open at least five years and you must be 59½ or older for a distribution to qualify.
Annual contribution limits cap how much new money you can shelter this way. But for funds already inside a retirement account, using a CD locks in a rate without creating an annual taxable event.
Special Situations
Brokered CDs
Brokered CDs sold through a brokerage can trade above or below face value, which adds complications. If you pay more than face, the excess is bond premium, and you can elect to amortize it over the remaining life of the CD, reducing the interest you report each year.13eCFR. 26 CFR 1.171-2 – Amortization of Bond Premium If you pay less than face, the difference is market discount, and it’s recognized as ordinary interest income at maturity or on sale rather than as capital gain. Selling a brokered CD before maturity can produce capital gain or loss on the price change not attributable to accrued interest or market discount.
CDs in a Child’s Name
The kiddie tax limits how much investment income you can shift to a child. For 2026, a child’s unearned income is tax-free on the first $1,350, taxed at the child’s own rate on the next $1,350, and taxed at the parent’s marginal rate above $2,700. The rules apply to children under 19, or under 24 if they’re full-time students who don’t provide more than half of their own support. Parents can report the child’s interest on their own return using Form 8814, or the child can file separately using Form 8615.
Inherited CDs
Interest that accrued on a CD before the original owner’s death is “income in respect of a decedent.” It was never taxed on the decedent’s final return, and whoever inherits the CD reports it as income.14Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators Interest earned after the date of death is ordinary income to whoever receives it. Depending on when funds are distributed, that post-death interest may show up on the estate’s Form 1041 or on the beneficiary’s own return.
Non-Resident Aliens
A non-resident alien earning interest on a CD at a U.S. bank is generally exempt from U.S. federal income tax on that interest, as long as it isn’t connected to a U.S. trade or business. The IRS treats deposit interest from U.S. banks, savings and loan associations, and credit unions as nontaxable for non-resident aliens under Internal Revenue Code sections 871(h) and (i).15Internal Revenue Service. Nontaxable Types of Interest Income for Nonresident Aliens The interest is also not reportable on Form 1042-S.16Internal Revenue Service. Amounts That Are Not Subject to Reporting on Form 1042-S Your home country may still tax the interest, and any applicable treaty controls.