Interest from a certificate of deposit is taxed as ordinary income at your federal marginal rate, which runs from 10% to 37% in 2026, plus state income tax in most states and an extra 3.8% surtax for high earners. So how much are CDs taxed in practice? A 5% APY CD held by someone in the 24% federal bracket nets roughly 3.8% after federal tax, and less once state tax is applied. The exact bite depends on your total income, your filing status, where you live, and whether the CD sits inside a retirement account.
Your Federal Rate on CD Interest
The IRS treats CD interest the same as wages: ordinary income, taxed at whatever bracket your last dollars of income land in. It does not qualify for the lower rates that apply to long-term capital gains or qualified dividends.
For 2026, single filers pay 10% on income up to $12,400, 12% up to $50,400, 22% up to $105,700, 24% up to $201,775, 32% up to $256,225, 35% up to $640,600, and 37% above that. Married couples filing jointly get roughly double the width at each step.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Because the brackets are progressive, your CD interest only pays the top rate on the portion that sits in that top bracket. If you earn $95,000 in salary and $5,000 in CD interest, part of the interest fills out your 22% bracket and only the amount above $105,700 crosses into 24%. A quick after-tax yield estimate: multiply the APY by (1 minus your marginal rate). At 5% and a 24% bracket, that works out to about 3.8%.
The 3.8% Surtax for High Earners
If your modified adjusted gross income tops $200,000 for a single filer or $250,000 for a married couple filing jointly, CD interest is also hit by the Net Investment Income Tax, an extra 3.8%. Those thresholds are fixed by statute and don’t adjust for inflation, so they catch more people each 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 A taxpayer in the 37% bracket who also owes the surtax pays a combined 40.8% federal rate on CD interest, before any state tax.
What State Tax Adds
Most states tax CD interest as ordinary income on top of the federal rate. Eight states levy no individual income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. Residents there keep the full post-federal amount. Elsewhere, state rates can push past 13% at the top, which stacks directly onto the federal rate.
One comparison worth running in a high-tax state: U.S. Treasury interest is exempt from state and local income taxes, while CD interest is not. A Treasury yielding 4.5% can come out close to or ahead of a 5% CD once state tax is factored in.
When You Owe the Tax
You owe tax on CD interest in the year it’s credited and available to you, not the year you actually withdraw it. The IRS calls this “constructive receipt.” Interest posted to your account in December is December’s income even if you leave it there until March.4eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income
For a CD that matures inside the same calendar year, the bank credits the interest, issues a 1099-INT, and you report the amount in Box 1. If your total taxable interest from all sources is $1,500 or less, it goes directly on Form 1040; above that you also file Schedule B.5Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends You must report all taxable interest even if the amount is under $10 and no form is issued.6Internal Revenue Service. Topic No. 403, Interest Received
Multi-Year CDs: Tax on Interest You Haven’t Been Paid
CDs with terms longer than one year are the trap. Under the Original Issue Discount rules, you must report a portion of the interest each year the CD is outstanding, even if the bank pays nothing until maturity.7Internal Revenue Service. Publication 550 – Investment Income and Expenses The bank uses a constant-yield method to figure each year’s accrual and reports it on Form 1099-OID to both you and the IRS, so skipping a year generates a mismatch notice.8eCFR. 26 CFR 1.1272-1 – Current Inclusion of OID in Income
So a five-year CD creates five annual tax bills, not one at maturity. If paying tax on money you haven’t touched is a problem, a shorter-term ladder or a tax-advantaged account solves it.
The Deduction for Early Withdrawal Penalties
Cashing out a CD before maturity usually costs you several months of interest. That penalty is deductible. The bank reports it in Box 2 of your 1099-INT, and you claim it as an adjustment to income on Schedule 1 of Form 1040.9Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID
This is an above-the-line deduction, so it reduces your adjusted gross income directly and you don’t need to itemize to claim it. A lower AGI can also improve your eligibility for income-sensitive credits.
You can deduct the full penalty even when it exceeds the interest earned. If a CD earned $300 but the bank charged $450 to break it, you report $300 of interest income and deduct $450 on Schedule 1, netting a $150 loss against other income.
Sheltering CD Interest in an IRA or Roth IRA
The cleanest way to avoid tax on CD interest is to hold the CD inside a retirement account. Many banks and brokerages offer IRA CDs.
In a traditional IRA, nothing is taxed as it accrues. The CD compounds tax-deferred, and you pay ordinary income tax only when you withdraw in retirement. Contributions may be deductible depending on your income and whether you or your spouse is covered by a workplace plan. For 2026 the IRA contribution limit is $7,500, with an extra $1,000 catch-up if you’re 50 or 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 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 five years. Roths are particularly useful for multi-year CDs because they sidestep the OID problem of paying tax annually on interest you haven’t received.
The limit is the catch. You can’t put $50,000 in an IRA CD the way you can in a taxable bank CD; you’re capped at the annual contribution.
Special Situations to Know About
CDs in a Child’s Name
Putting a CD in a child’s name doesn’t guarantee the child’s lower rate. Under the kiddie tax, for a child under 19 (or under 24 if a full-time student), the first $1,350 of unearned income in 2026 is covered by the standard deduction, the next $1,350 is taxed at the child’s rate, and anything above $2,700 is taxed at the parent’s marginal rate. A $50,000 CD at 5% throws off $2,500 in annual interest, enough to pull roughly $1,150 of it up to the parent’s bracket.
Inherited CDs
The principal of an inherited CD is not taxable income to you. Interest that accrued before the original owner’s death is handled on the decedent’s final return or the estate return. Interest that accrues after the date of death is ordinary income to whoever inherits the CD, taxed at that person’s rate, whether the CD passes by will, trust, or payable-on-death designation.
Brokered CDs Sold Before Maturity
Brokered CDs trade on a secondary market. Selling one before maturity produces a capital gain or loss based on the difference between sale price and your adjusted cost basis, not a bank-style early withdrawal penalty. Held more than a year, the gain qualifies for long-term capital gains rates. Accrued interest, however, is still ordinary income regardless of holding period.
Nonresident Aliens
Interest a nonresident alien earns on a CD at a U.S. bank, savings and loan, credit union, or insurance company is generally not subject to U.S. federal income tax, provided the income isn’t connected to a U.S. trade or business.11Internal Revenue Service. Nontaxable Types of Interest Income for Nonresident Aliens To claim the exemption, give the bank Form W-8BEN rather than Form W-9. The interest should not be reported as income on Form 1040-NR.
CDs at Foreign Banks
Interest on a foreign CD is taxable as ordinary U.S. income just like a domestic CD. If the combined balance of all your foreign financial accounts tops $10,000 at any point in the year, you must also file an FBAR with FinCEN.12FinCEN.gov. Report Foreign Bank and Financial Accounts Penalties for missing the filing are steep even when the failure is unintentional.13Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR)