Interest earned on a certificate of deposit is taxed as ordinary income at your regular federal rate, which for 2026 runs from 10% to 37%. The IRS treats every dollar of CD interest the same as wages, so there is no preferential rate like the one that applies to long-term capital gains or qualified dividends. Depending on where you live and how much you earn, you may also owe state income tax and, above certain income thresholds, an extra 3.8% federal surtax on that interest.1Internal Revenue Service. Federal Income Tax Rates and Brackets
What Rate You Pay
CD interest lands on your return as ordinary income and is taxed at whatever marginal bracket your total earnings put you in. Earn $1,000 of CD interest in the 24% bracket and $240 goes to the IRS off the top. The same $1,000 in qualified dividends might be taxed at 15% or even zero. Interest never gets that treatment.2Internal Revenue Service. Topic No. 403, Interest Received
Marginal brackets work in layers. If CD interest pushes part of your income from the 22% bracket into the 24% bracket, only the portion above the 24% threshold gets the higher rate. The rest of your income stays where it was. Still, the interest sitting in that top slice costs you more per dollar than the rest of your earnings.1Internal Revenue Service. Federal Income Tax Rates and Brackets
When the Interest Becomes Taxable
The IRS does not wait until your CD matures. Under a rule called constructive receipt, interest counts as income in the year it is credited to your account or made available to you, whether you withdraw it or not.3eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income
For a typical CD that credits interest every year, this is simple. A five-year CD paying $500 annually means you report $500 each year, not $2,500 all at once at the end.4Internal Revenue Service. Publication 550 – Investment Income and Expenses
Long-term CDs that defer all interest until maturity work differently. If interest is deferred for more than one year, the IRS generally treats the CD as an original issue discount instrument. You owe tax on the interest as it accrues each year, even though the bank has not paid you anything yet. Your bank reports the accrued interest on Form 1099-OID instead of a 1099-INT. If you believe your CD qualifies as an OID instrument and no 1099-OID arrives, you are still responsible for calculating and reporting the income.5Internal Revenue Service. Guide to Original Issue Discount (OID) Instruments
How to Report It
Banks and credit unions must send you a Form 1099-INT by the end of January for any calendar year in which they paid you $10 or more in interest, and they report the same figure to the IRS.6Office of the Law Revision Counsel. 26 U.S. Code 6049 – Returns Regarding Payments of Interest The form shows total interest credited and any federal tax withheld, though withholding on domestic CD interest is uncommon unless backup withholding applies.
Earning less than $10 does not exempt you. The $10 figure triggers the bank’s reporting obligation, not yours. Every dollar of interest is taxable whether a form arrives or not.2Internal Revenue Service. Topic No. 403, Interest Received
If your total taxable interest for the year exceeds $1,500, you must file Schedule B with your Form 1040 and list each payer and amount.7Internal Revenue Service. 2026 Schedule B (Form 1040) Below that, you report the total on your 1040 without the extra schedule. Check the 1099-INT against your own records either way. Banks occasionally make errors, and you are the one who pays for them.
Deducting an Early Withdrawal Penalty
Cashing out a CD before maturity almost always triggers a penalty from the bank.8HelpWithMyBank.gov. What Are the Penalties for Withdrawing Money Early from a Certificate of Deposit (CD)? The IRS lets you deduct that penalty as an adjustment to income, and you do not have to itemize to claim it. Report the full interest from your 1099-INT, then subtract the penalty separately on Schedule 1 of Form 1040. The statute specifically allows this deduction for penalties forfeited to banks on time savings accounts and certificates of deposit.9Office of the Law Revision Counsel. 26 U.S. Code 62 – Adjusted Gross Income Defined
Because this adjustment reduces your adjusted gross income, it can also help with tax benefits that phase out at higher income levels. Do not skip it.
The 3.8% Net Investment Income Tax
Higher earners face an added layer. The Net Investment Income Tax is a 3.8% surtax on investment income, including CD interest, that applies when your modified adjusted gross income exceeds these thresholds:10Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax
- Single or head of household: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
The tax is charged on the lesser of your net investment income or the amount by which your MAGI exceeds the threshold.11Internal Revenue Service. Topic No. 559, Net Investment Income Tax These thresholds are not adjusted for inflation. They have been frozen at the same dollar amounts since 2013, so more taxpayers cross them each year as wages and yields rise. If you are close to the line, a year of strong CD interest can be what pushes you over.
State Tax and the Treasury Comparison
Most states with an income tax treat CD interest the same way the federal government does, adding it to your taxable base at ordinary rates. A handful of states impose no income tax at all, which removes this layer.
Interest from U.S. Treasury securities, by contrast, is exempt from state and local income tax. CD interest is not.2Internal Revenue Service. Topic No. 403, Interest Received For someone in a high-tax state, a Treasury bill yielding slightly less than a CD can produce more after-tax income once state tax is factored in. Run the numbers rather than assume the higher advertised rate wins.
CDs Held Inside an IRA
The rules above assume you own the CD in a regular taxable account. A CD held inside a traditional IRA grows tax-deferred: you receive no annual 1099-INT and owe no annual tax on the earnings. You pay ordinary income tax when you take distributions, usually in retirement, and generally owe a 10% penalty on early distributions before age 59½.
A Roth IRA is more favorable. Contributions go in after tax, and qualified withdrawals of both principal and earnings come out tax-free. To qualify, you must be at least 59½ and the account must have been open at least five years, counting from January 1 of the year of your first Roth contribution.12Vanguard. IRA Withdrawal Rules Explained
Liquidity is the trade-off. Break the CD early and you owe the bank’s penalty. Pull the money out of the IRA before qualifying and you owe the IRS as well. Those two penalties stack.
Estimated Tax Payments
If CD interest is a large share of your income and you do not have enough tax withheld elsewhere, you may need to make quarterly estimated payments. The IRS expects tax to be paid throughout the year, and falling short can trigger an underpayment penalty even when you settle the full balance by April.13Internal Revenue Service. Pay As You Go, So You Won’t Owe: A Guide to Withholding, Estimated Taxes, and Ways to Avoid the Estimated Tax Penalty
The common safe harbor: pay at least 90% of the current year’s liability through withholding and estimated payments, or 100% of last year’s tax (110% if your AGI was above $150,000). If your CD interest is modest next to your wage income, raising your W-4 withholding at work is usually easier than mailing quarterly checks.
CDs Held at Foreign Banks
Interest from a CD at a bank outside the United States is fully taxable on your federal return, and holding one triggers reporting requirements that do not apply to domestic accounts. If the combined value of all your foreign financial accounts exceeds $10,000 at any point during the year, you must file a Report of Foreign Bank and Financial Accounts (FBAR) with FinCEN.14FinCEN. Reporting Maximum Account Value
FATCA is separate. It requires you to report specified foreign financial assets on Form 8938 above higher thresholds: for an unmarried taxpayer living in the United States, $50,000 on the last day of the tax year or $75,000 at any point during the year, with double those figures for joint filers.15Internal Revenue Service. Summary of FATCA Reporting for U.S. Taxpayers Meeting one filing does not excuse the other, and the penalties for missing either are steep.