Short answer
CD interest is taxable income. After-tax yield = APY × (1 − tax rate), so a 4.50% APY in the 24% bracket is 3.42%.
1. How CD interest is taxed
- CD interest is taxed as ordinary income at your federal rate, and often at state rate too.
- You are usually taxed in the year the interest is credited, not only at maturity.
- Your bank sends Form 1099-INT, normally when you earn $10 or more in a year.
- For a CD longer than one year you generally report the interest each year, even if it is paid at maturity.
- CDs held in an IRA are not taxed until you withdraw.
2. After-tax return
After-tax yield = APY × (1 − tax rate). $10,000 at 4.50% APY for 12 months earns $450:
| Federal bracket | Tax | After-tax interest | After-tax yield |
|---|---|---|---|
| 12% | $54.00 | $396.00 | 3.96% |
| 22% | $99.00 | $351.00 | 3.51% |
| 24% | $108.00 | $342.00 | 3.42% |
| 32% | $144.00 | $306.00 | 3.06% |
3. A two-year example
$10,000 at 4.50% APY for 24 months earns $450.00 in year one and $470.25 in year two (10,450 × 0.045), $920.25 in total. In the 24% bracket the tax is $108.00 and $112.86, so you keep $699.39.
4. Comparing with tax-free interest
A taxable yield equal to a tax-free 4.50% is 4.50% ÷ (1 − 0.24) = 5.92% in the 24% bracket. Interest from US Treasury securities is exempt from state and local income tax, which can matter in high-tax states.
5. Check your answer
- After-tax yield is always lower than the APY unless your tax rate is 0%.
- Add state tax by using your combined rate.
- Your tax rate is the bracket for your next dollar of income, not your average rate.
6. Frequently asked questions
Is CD interest taxable?expand_more
Yes. It is ordinary income, taxed in the year it is credited, and reported on Form 1099-INT.
Do I pay tax on a CD before it matures?expand_more
Generally yes. Interest is usually taxable in the year it is credited, even if you cannot withdraw it without a penalty.
How do I work out the after-tax yield?expand_more
Multiply the APY by (1 − your tax rate). At 4.50% APY and 24%, it is 3.42%.
Are CDs in an IRA taxed?expand_more
Not until you withdraw. In a traditional IRA, withdrawals are taxed as income, and in a Roth IRA, qualified withdrawals are tax-free.