Interest from a fixed deposit — called a certificate of deposit, or CD, in the United States — is taxed as ordinary income at your regular federal rate. It stacks on top of your wages and other income, and whatever marginal bracket the combined total lands in is the rate you pay. For 2026, federal rates run from 10 percent to 37 percent.1Internal Revenue Service. Federal Income Tax Rates and Brackets Most states add their own tax on top, and higher earners can face an extra 3.8 percent surtax.
The 2026 Federal Rate on Your CD Interest
Because CD interest is ordinary income, not a capital gain, it doesn’t qualify for the lower long-term capital gains rates. The IRS treats it the same as salary. For a single filer in 2026, the marginal rates and income ranges are:1Internal Revenue Service. Federal Income Tax Rates and Brackets
- 10% up to $11,925
- 12% from $11,926 to $48,475
- 22% from $48,476 to $103,350
- 24% from $103,351 to $197,300
- 32% from $197,301 to $250,525
- 35% from $250,526 to $626,350
- 37% over $626,350
These are marginal, so only the dollars that fall inside a given range are taxed at that range’s rate. If your salary already puts you in the 22 percent bracket and CD interest pushes a few thousand dollars into the 24 percent bracket, only those extra dollars face 24 percent. To estimate what you’ll owe, take the interest paid on your CD in the calendar year and multiply it by whichever rate your top bracket sits at after adding that interest to your other income.
The 3.8% Net Investment Income Tax for Higher Earners
On top of the ordinary rate, high-income taxpayers may owe an additional 3.8 percent Net Investment Income Tax (NIIT) on CD interest. It kicks in when modified adjusted gross income exceeds:2Office of the Law Revision Counsel. 26 U.S.C. 1411 – Imposition of Tax
- $200,000 for single or head of household filers
- $250,000 for married filing jointly
- $125,000 for married filing separately
The 3.8 percent applies to the lesser of your net investment income or the amount by which your income exceeds the threshold. These thresholds are written into the statute and don’t adjust for inflation, so more taxpayers cross them every year. If you’re close to the line, CD interest can be the income that tips you over. NIIT is reported on Form 8960.3Internal Revenue Service. Instructions for Form 8960
When the Interest Becomes Taxable
This is where multi-year CDs trip people up. Most individuals are cash-method taxpayers, meaning you owe tax on interest in the year it is credited to your account or made available to withdraw. You don’t have to actually take the money out. If your bank posts $400 of interest to your CD in December, that $400 is taxable this year even if the CD doesn’t mature until next July.4Internal Revenue Service. Publication 550, Investment Income and Expenses The IRS calls this constructive receipt, and it applies even when pulling the money out early would trigger a penalty.
A CD that only pays interest at maturity is different in feel but not in principle: check your 1099-INT each year, because banks often credit interest annually to the account balance even when you can’t touch it until the term ends.
How to Report It on Your Tax Return
Every bank that paid you $10 or more in interest sends you a Form 1099-INT and files a copy with the IRS. Box 1 is your taxable interest, Box 2 is any early withdrawal penalty, and Box 4 is any federal tax withheld.5Internal Revenue Service. Form 1099-INT – Interest Income Interest under $10 is still fully taxable — the bank just isn’t required to send a form. You have to report it either way.6Internal Revenue Service. Topic No. 403, Interest Received
Where the interest goes on your return depends on the total. If your combined taxable interest from all sources is $1,500 or less, enter it directly on Form 1040. Above $1,500, you file Schedule B and list each paying institution and its amount before carrying the total to your 1040.7Internal Revenue Service. Instructions for Schedule B (Form 1040) Schedule B is also required if you received interest as a nominee or hold a foreign account.
Banks generally do not withhold federal tax on CD interest paid to U.S. residents. There’s one exception: if you failed to give the bank a correct Social Security number, or the IRS told the bank you previously underreported interest, the bank must withhold 24 percent as backup withholding.8Office of the Law Revision Counsel. 26 U.S.C. 3406 – Backup Withholding That’s a prepayment against your annual bill, not an additional tax; it shows up as a credit when you file.
Deduct the Early Withdrawal Penalty
If you break a CD before it matures, the bank charges a penalty and reports the full pre-penalty interest as taxable. The good news is that the penalty is deductible as an adjustment to gross income.9Office of the Law Revision Counsel. 26 U.S.C. 62 – Adjusted Gross Income Defined This is an above-the-line deduction, so you get it whether you itemize or take the standard deduction.
The penalty amount sits in Box 2 of your 1099-INT and goes on Schedule 1 of Form 1040. People overlook it all the time. Beyond the direct tax savings, lowering your adjusted gross income can matter for other deductions and credits that phase out at income thresholds.
State Income Tax
Most states treat CD interest the same way the federal government does: as ordinary income on your state return. Rates and bracket structures vary, and a handful of states have no individual income tax at all, in which case your CD interest escapes state tax entirely. Check your state’s department of revenue for the applicable rate.
What Happens If You Don’t Report It
The IRS matches every 1099-INT against the corresponding return. If the numbers don’t line up, you’ll get a notice proposing additional tax. On top of that tax, an accuracy-related penalty of 20 percent applies to any underpayment caused by negligence or a substantial understatement of income.10Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments Interest also accrues on the unpaid balance from the original due date.
Not receiving a 1099 isn’t a defense. The obligation to report exists whether or not any form arrives.6Internal Revenue Service. Topic No. 403, Interest Received If you spot a CD you missed on last year’s return, filing an amended return before the IRS contacts you is the cleanest fix and may help you avoid the negligence penalty.
Situations Where the Basic Rule Doesn’t Fully Apply
A CD Held in a Child’s Name
Opening a CD in a child’s name only shifts the tax so far. For 2026, the first $1,350 of a child’s unearned income is tax-free and the next $1,350 is taxed at the child’s rate; anything above $2,700 is taxed at the parent’s marginal rate.11Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income The kiddie tax covers children under 19, or under 24 if they’re full-time students, and is reported on Form 8615.
Joint CDs Outside a Married Return
When two people who don’t file jointly share a CD, the bank issues a single 1099-INT under one Social Security number. That person reports the full amount on Schedule B, then subtracts the co-owner’s share as a nominee distribution and files a separate 1099-INT (with Form 1096) to the IRS on the other owner’s behalf.12Internal Revenue Service. Instructions for Schedule B (Form 1040) Skip this and the IRS thinks all the interest is yours.
Fixed Deposits at Foreign Banks
Interest on a fixed deposit at a bank outside the United States is still fully taxable on your federal return. Two extra reporting obligations kick in. If your foreign financial accounts combined exceed $10,000 at any point in the year, you file the FBAR (FinCEN Form 114) electronically.13FinCEN.gov. Report Foreign Bank and Financial Accounts Separately, if you live in the U.S. and your foreign financial assets exceed $50,000 at year-end (or $75,000 at any point), you file Form 8938 with your return, with the thresholds doubled for joint filers and higher for those living abroad.14Internal Revenue Service. Instructions for Form 8938 A single foreign CD can trigger both.
Interest Credited After the Owner’s Death
Interest earned up to the date of death goes on the decedent’s final return. Interest that accrues after death is income in respect of a decedent and is reported by whoever receives it, whether the estate or a named beneficiary, still as ordinary interest.15Internal Revenue Service. Publication 559, Survivors, Executors, and Administrators When a 1099-INT straddles the date of death, the personal representative has to split the interest between the two returns to keep the records matched.