Do you pay tax on CD earnings?

With inflation high, the stock market volatile and two major banks closed, many Americans are looking for safer investments for their money — such as Certificate of Deposit (CD).

Just don’t CDs offer a guaranteed rate of return, but thanks to rising interest rates, they come with higher earning potential than many other investment vehicles. Currently, some offer CD accounts APYs of 4% or higher. Your typical bank savings account offers a rate of just 0.37%.

Still, those earnings don’t come for free. if you CD Investment ConsiderationsHere’s what you need to know about how they’re taxed.

Check today’s CD interest rates here to see how much you could earn.

Do you pay tax on CD earnings?

The IRS generally considers CD income a type of income. This makes them subject to the same federal and state income taxes as any other income.

“The interest rate a CD pays you is called the yield,” says Mark Barnes, an enrolled agent and managing partner at Copper Canyon Tax & Financial Services in Tuscon, Arizona. “The yield earned on a CD is considered taxable on both state and federal tax returns. This is true regardless of how the money is paid to the investor – whether physically received or reinvested.”

Explore your CD options here.

How Much Tax Will You Pay on CD Income?

The total tax you pay on your CD earnings depends on two factors: how much interest your CD earned and what tax bracket you fall into.

For the former, see Form 1099-INT, which your bank or lending institution should send you by January 31. It contains details of your total interest income from the previous year.

Your tax bracket, on the other hand, depends on the amount of taxable income you bring in each year (including your CD interest).

“The federal tax bracket for 2022 and 2023 ranges from 10% to 37% depending on a taxpayer’s filing status and taxable income,” said Robin E. Caruso is a partner and co-head of Prager Métis’ national tax litigation practice in Cranbury, New Jersey.

How to reduce the amount of tax you pay on CD income

A way to reduce the taxes you pay — on CD income Or else — living somewhere with no state income tax, like Texas or Washington.

You can also use certain types of retirement accounts buy a cd. Traditional IRAs, for example, are not taxable until you withdraw the money in retirement. (Just remember, if you fall into a higher tax bracket, you may pay more tax).

Finally, you can also look into other types of investments.

“For people in high-income-tax states like California or New York, it can be worthwhile to compare CD income with government-backed T-bill and Treasury income,” said Michael Ashley Shulman, partner and chief investment officer at Running Point in the El Segundo, California capital. adviser “Income earned on them is not subject to state tax.”

If you think a CD is right for you, check today’s CD interest rates online now.

The bottom line is

At the end of the day, everyone’s tax situation is different. If you want to avoid an additional tax burden — or just want to maximize your tax refund — it’s always best to consult a tax professional when planning and filing your tax return. They can help you better estimate (and prepare for) what taxes your CDs and other investments might require.