Certificates of deposit tend to offer lower rates of return than other, more risky investments, like stocks or mutual funds, because your interest rate is guaranteed and the money is covered by the Federal Deposit Insurance Corporation. However, the rates are typically higher than for other deposit accounts, like savings or checking accounts, because you agree to leave the money in the account for a certain period of time. Any interest that you earn on the CD counts as taxable income that you must report to the Internal Revenue Service when you file your taxes.
Check Box 1 the Form 1099-INT your bank sent you to find the interest earned on the CD during the year. If you have not received a Form 1099-INT by early February, contact the bank.Step 2
Add the CD interest to all your other taxable interest for the year. If the total exceeds $1,500, you must file Schedule B and use either Form 1040 or Form 1040A to file your taxes. If you are required to file Schedule B, list each source of interest income in Part I and report the total interest on line 2.Step 3
Report the interest income on your income tax return. If you're using Form 1040-EZ -- which you can only use if you're not required to file Schedule B -- the total interest goes on line 2. If you're using Form 1040 or Form 1040A, the total interest goes on line 8a.
- If you take an early withdrawal from your CD, the bank will likely charge you a penalty. This penalty is deductible on line 30 of Form 1040.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."