Interest from a certificate of deposit is taxed as ordinary income at your federal marginal rate, which runs from 10% to 37% for 2026, and most states tax it again on top. So how much are CDs taxed in practice? A 5% APY CD held by someone in the 24% federal bracket nets about 3.8% after federal tax, and less once state tax and, for high earners, a 3.8% surtax are layered in.
Federal Tax Rates on CD Interest
The IRS treats CD interest the same as wages: ordinary income, taxed at whatever marginal bracket your total income lands in. It does not get the lower rates that apply to long-term capital gains or qualified dividends.
For 2026, the federal brackets for single filers are:
- 10% up to $12,400
- 12% from $12,401 to $50,400
- 22% from $50,401 to $105,700
- 24% from $105,701 to $201,775
- 32% from $201,776 to $256,225
- 35% from $256,226 to $640,600
- 37% over $640,600
Married couples filing jointly get brackets that span roughly double those amounts.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Because the system is progressive, only the CD interest that pushes you into a higher bracket is taxed at that higher rate. Earn $95,000 in salary and $5,000 in CD interest, and only the sliver above $105,700 is taxed at 24%; the rest stays at 22%. A quick estimate for after-tax yield: multiply the APY by (1 minus your marginal rate). Five percent at a 24% bracket comes out around 3.8%.
The 3.8% Net Investment Income Tax
Higher earners owe an extra 3.8% surtax on CD interest through the Net Investment Income Tax. It applies once modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers. Those thresholds are set by statute and don’t index for inflation, so more filers cross them every year.2Internal Revenue Service. Net Investment Income Tax
The 3.8% applies to the lesser of your net investment income or the amount by which your MAGI exceeds the threshold.3Internal Revenue Service. Topic No. 559, Net Investment Income Tax At the top, a filer in the 37% bracket who also owes the surtax faces 40.8% federal on CD interest, before any state tax.
State Taxes Stack on Top
Most states tax CD interest as ordinary income at their own rates. Eight states levy no individual income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. Residents there keep more of the yield. At the other end, top state rates can exceed 13%.
One boundary worth naming: U.S. Treasury interest is exempt from state and local income tax, but bank CD interest is not. If you’re comparing a Treasury yielding 4.5% to a CD yielding 5% in a high-tax state, the state tax you owe on the CD narrows the gap.
When You Owe the Tax
You owe tax on CD interest in the year it is credited and available to you, not the year you spend it. The IRS calls this constructive receipt. Interest posted in December is taxable that year even if you leave it in the account until March.4eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income
Short CDs that mature within the calendar year are simple: the bank credits the interest, you report it, done. Multi-year CDs are the ones that trip people up.
Multi-Year CDs and Phantom Income
If your CD’s term is longer than a year, the IRS requires you to report a share of the total interest each year even when the bank pays nothing until maturity. This falls under the Original Issue Discount rules.5Internal Revenue Service. Publication 550 – Investment Income and Expenses The bank uses a constant-yield method to figure the annual accrual and reports it to you and the IRS, so skipping a year draws a mismatch notice.6eCFR. 26 CFR 1.1272-1 – Current Inclusion of OID in Income
The catch is that you owe tax on money you haven’t received. If cash flow matters, a ladder of shorter CDs or holding the multi-year CD inside a retirement account avoids the problem.
How to Report CD Interest
Your bank reports CD interest on Form 1099-INT for interest actually paid, or Form 1099-OID for accrued interest on CDs longer than a year. Some banks combine stated interest and OID on a single 1099-OID rather than issuing both.7Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID Forms arrive by the end of January.
On the 1099-INT, Box 1 shows total taxable interest for the year. All taxable interest goes on your return even if the amount is under $10 and no form is issued.8Internal Revenue Service. Topic No. 403, Interest Received
If your total taxable interest across all sources is $1,500 or less, it goes directly on Form 1040. Above $1,500, you file Schedule B to itemize each source, with the total flowing back to the 1040.9Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends If you hold CDs at more than one bank, match every 1099 to what you report. The IRS matches automatically, and a forgotten $200 of interest from a second bank is a common trigger for a notice.
Deducting an Early Withdrawal Penalty
Breaking a CD before maturity usually costs several months of interest. That penalty is deductible. It appears in Box 2 of your 1099-INT and is claimed as an adjustment to income on Schedule 1 of Form 1040.7Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID
This is an above-the-line deduction. You don’t need to itemize to claim it, and it lowers adjusted gross income directly, which can help with income-sensitive credits and deductions.
The full penalty is deductible even if it exceeds the interest earned that year. A CD that earned $300 but incurred a $450 penalty produces $300 of interest income and a $450 deduction, leaving a $150 net offset against other income.
Sheltering CD Interest in an IRA
The cleanest way to reduce the tax bill is to hold the CD inside a retirement account. Many banks and brokerages offer CDs inside both traditional and Roth IRAs.
Inside a traditional IRA, CD interest accrues tax-deferred; you pay ordinary income tax only when you withdraw in retirement. Contributions may be deductible depending on income and workplace plan coverage. The 2026 IRA contribution limit is $7,500, with a $1,000 catch-up for those 50 and older.10Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
A Roth IRA goes further. Contributions are after-tax, but the interest grows tax-free and qualified withdrawals owe nothing. To pull earnings out tax-free you generally need to be at least 59½ and to have held the Roth for at least five years. Roth IRAs also sidestep the OID headache on multi-year CDs entirely.
The trade-off is the annual contribution limit and early-withdrawal restrictions. You can’t move $50,000 into an IRA CD the way you can with a taxable one, but for amounts that fit the limit, the tax savings compound.
Special Situations
CDs in a Child’s Name
Putting a CD in a child’s name doesn’t shift the interest to the child’s tax rate. The kiddie tax applies to unearned income for children under 19, or under 24 if they are full-time students. For 2026, the first $1,350 of a child’s unearned income is covered by the standard deduction. The next $1,350 is taxed at the child’s own rate. Anything above $2,700 is taxed at the parent’s marginal rate. A $50,000 custodial CD at 5% produces $2,500 of interest, and roughly $1,150 of that hits the parent’s rate.
Inheriting a CD
The principal you inherit is not taxable income. Interest that accrued before the original owner’s death is handled on the decedent’s final return or the estate’s return. Interest that accrues after the date of death is ordinary income to whoever inherits the CD and is taxed at that person’s regular rate, whether the CD passes by will, trust, or payable-on-death designation.
Brokered CDs Sold Early
A brokered CD sold on the secondary market before maturity produces a capital gain or loss based on the difference between sale price and adjusted cost basis, reported on your brokerage’s annual 1099. Held more than a year, a gain qualifies for long-term capital gains rates. Accrued interest is still taxed as ordinary income regardless of holding period.
Nonresident Aliens
Interest on CDs at U.S. banks, savings and loans, credit unions, and insurance companies is generally not subject to U.S. federal income tax for nonresident aliens, provided the income isn’t connected to a U.S. trade or business.11Internal Revenue Service. Nontaxable Types of Interest Income for Nonresident Aliens Providing Form W-8BEN to the institution rather than Form W-9 documents the status.
Foreign CDs Held by U.S. Taxpayers
Interest on a CD held at a foreign bank is taxable as ordinary income on your U.S. return just like domestic CD interest. If the aggregate balance of all your foreign financial accounts tops $10,000 at any point during the year, you also have to file an FBAR with FinCEN.12FinCEN.gov. Report Foreign Bank and Financial Accounts The trigger is the total across all foreign accounts, so a $6,000 foreign CD plus a $5,000 foreign checking balance crosses the line.13Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR)