How CD Interest Is Taxed: 1099-INT, Timing and After-Tax Returns

CD interest is usually taxable income in the United States. Taxes can take a noticeable bite out of the advertised rate, so it's worth knowing how they work before comparing a CD with other options.

How it's taxed

CD interest in a regular (taxable) account is taxed as ordinary income at your federal rate, not at lower capital gains rates.
It's generally subject to state and local income tax as well, unlike interest on US Treasury securities.
Interest is typically taxable in the year it's credited to your account, even if you don't withdraw it.

Form 1099-INT

Banks send Form 1099-INT for accounts that earned at least $10 of interest during the year. You must report all taxable interest, even if you don't receive a form. Early withdrawal penalties also appear on the 1099-INT and can generally be deducted as an adjustment to income.

Multi-year CDs

For CDs longer than a year, interest is usually reported each year as it's credited, so you pay tax annually rather than all at maturity. Special rules can apply to CDs that pay all interest only at maturity; your bank's year-end statement will show the amount reportable for each year.

After-tax yield

after-tax yield ≈ APY × (1 − combined tax rate)

Example: a 4.50% APY CD for someone with a 22% federal rate and 5% state rate: 4.50 × (1 − 0.27) = 3.29% after tax. On $20,000 for a year, that's $900 of interest and about $657 after tax. Enter your tax rate in the CD calculator to see the after-tax figure.

Comparing with Treasuries

Treasury bills and notes are exempt from state and local income tax. In a high-tax state, a Treasury yielding a little less than a CD can leave you with more after tax. Compare the after-tax yield of each.

Tax-advantaged accounts

Holding CDs inside an IRA defers taxes (traditional IRA) or can make qualified withdrawals tax-free (Roth IRA), subject to IRA rules. See types of CDs for IRA CDs, and the 401(k) calculator for workplace retirement plans.

Inflation and real return

After taxes, also consider inflation. If your after-tax yield is 3.3% and inflation is 3%, your purchasing power grows by only about 0.3% a year. That doesn't make CDs a bad choice for short-term savings, but it shows why they're rarely the main tool for long-term growth.

Keep records

Save year-end statements and 1099-INT forms.
Note any penalties paid.
Remember that interest reinvested in the CD is still taxable that year.

This is general educational information, not tax advice. Tax rules change and individual situations vary; consult the IRS or a tax professional.