Are Certificates of Deposit (CDs) Taxable in 2025? What You Need to Know About CD Interest and Taxes

Certificates of Deposit (CDs) offer a higher interest rate compared to traditional savings accounts by requiring you to lock in your funds for a fixed term. The longer the term, the more interest you typically earn.

However, it's important to understand how the IRS treats the interest you earn on CDs. This interest is considered taxable income and must be reported on your tax return, which can affect your overall investment returns.

Essential Points to Remember

• For CDs with terms exceeding one year, you must pay taxes on the interest earned each year throughout the term.
• For CDs with terms of one year or less, taxes are due on interest once it is earned and received.
• Early withdrawal penalties can reduce your taxable interest income.
• Holding CDs within tax-deferred retirement accounts like IRAs or 401(k)s can postpone taxes until you withdraw funds during retirement.

How Does the IRS Tax Interest Earned on CDs in 2024?

The IRS treats all interest earned on CDs as taxable income during the year it is accrued. If you earn more than $10 in interest, your bank is required to send you a Form 1099-INT detailing the interest income you must report.

Even if you reinvest the principal into a new CD, you still need to report the interest earned for that tax year. CDs held inside tax-advantaged retirement accounts are exempt from taxes until withdrawal.

If you do not receive a 1099-INT, you are still responsible for reporting the interest income on your tax return.

Taxation for CDs with Terms Longer Than One Year

For CDs lasting more than one year, you owe taxes annually on the interest accrued. For example, a three-year CD earning $15 in interest each year means you report $15 as income annually over the three years.

Tax Exceptions: Retirement Accounts and CDs

When CDs are held within tax-deferred retirement accounts such as 401(k)s or IRAs, you won't pay taxes on the interest earned until you take distributions after retirement.

Keep in mind that your contributions to these accounts must stay within IRS limits. For 2024, the 401(k) contribution limit is $23,000 with an additional $7,500 catch-up contribution for those 50 and older. IRA limits are $7,000 annually, or $8,000 if you’re 50 or older.

Estimating Taxes on Your CD Interest

The tax you owe on CD interest depends on your income tax bracket and the amount of interest earned. Consulting with a tax professional can provide personalized estimates based on your financial situation.

Is Cashing Out a CD Considered Taxable Income?

Only the interest earned on a CD is taxable income—not the principal. For instance, if you cash in a CD with $10,000 principal and $200 interest, you report the $200 as income and should receive a 1099-INT reflecting this.

Impact of Early Withdrawal Penalties on Taxes

If you withdraw funds before your CD matures, you may face an early withdrawal penalty. This penalty can be deducted from your taxable interest income, lowering the amount of tax you owe. For example, earning $50 in interest with a $20 penalty means you pay taxes on $30 of income.

Final Thoughts

In summary, all interest earned on CDs is subject to ordinary income tax each year unless the CD is held within a tax-advantaged retirement account. Understanding these tax rules can help you make informed decisions about investing in CDs and maximize your returns in 2024 and beyond.

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