Certificates of deposit are usually considered to be low-risk investments that can earn interest at a higher rate than a regular passbook savings account. When you purchase a CD, you are investing a fixed sum of money for a specified period of time. The financial institution then pays you interest at regular intervals on the amount of money you have invested. Interest earned on a certificate of deposit is considered earned income, and therefore it is taxable. You must report all taxable interest income to the IRS on the appropriate federal income tax return forms.
Step 1
Refer to Form 1099-INT to find out how much interest you received from a CD during the year. This is a statement that you will receive from the bank or financial institution that is paying you the interest. You are not required to attach this form to your federal tax return, but you should keep a copy with your personal financial records.
Step 2
Include interest earned as income when you actually receive it. The interest on certificates of deposit, which mature in one year or less are generally paid in a single payment at maturity, and are reported as income at that time.
Step 3
Report the total amount of interest paid or credited to your account even if you withdraw funds from the account before maturity. Do not subtract any penalty you may have to pay for early withdrawal. If you are charged a penalty for withdrawing funds from a deferred interest account such as a certificate of deposit before maturity, report the total amount of interest shown in box 1 of the Form 1099-INT that you receive. You may deduct the entire penalty shown in box 2 of Form 1099-INT on Form 1040, line 30.
Step 4
Add the total interest you earn on a certificate of deposit in your income even if you borrowed money from a bank or savings and loan to have the minimum deposit required to buy a CD. You may be able to deduct the interest you pay on the loan as investment interest if you itemize deductions on your federal income tax return. However, you may only deduct up to the amount of your net investment in interest.
Step 5
Report all taxable interest income on the long Form 1040 or the short Form 1040A, line 8a. You may be able to use Form 1040EZ insofar as your interest income is no more than $1,500. If you itemize deductions rather than take the standard deduction, you must use Form 1040.
Step 6
Complete Schedule B---Interest and Ordinary Dividends---if the taxable interest income you report on Form 1040 is more than $1,500. Complete Schedule 1 if you report more than $1,500 taxable interest income on Form 1040A. List the name of each payer along with the amount of interest income you received.
Things You'll Need
- Form 1099-INT
- Form 1040, 1040A or 1040EZ
- Schedule B or Schedule 1
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