How are Certificate of Deposit Earnings Taxed?
1. Interest Income: The interest earned on CDs is considered taxable income by the IRS (Internal Revenue Service) in the United States. This interest income must be reported on your annual income tax return.
2. Tax Rate: The tax rate applied to CD earnings depends on your overall taxable income and your tax filing status. CD interest is taxed at your ordinary income tax rate, which may vary depending on your tax bracket.
3. Tax Reporting: Financial institutions typically provide Form 1099-INT to account holders, summarizing the interest earned on CDs during the tax year. You must report this interest income on your tax return, even if you do not receive a Form 1099-INT.
4. Tax-Deferred Accounts: If you hold CDs within a tax-deferred retirement account, such as an IRA (Individual Retirement Account) or 401(k), CD earnings are not taxed until you make withdrawals from the account. However, withdrawals from these accounts may be subject to income tax and potentially early withdrawal penalties.