Certificates of deposit (CDs) are among the safest investments available. What about the interest you earn - is there a CD tax? When do you have to pay tax on CD income, and how can you avoid it? If your CD is not in any type of tax-favored account, you generally have to pay.
CD Tax Overview
The earnings you make on a CD are generally interest income, taxed in the year you earn the interest. If your bank sends you a 1099-INT form at the end of the year, expect to pay tax on CD earnings. Effectively, this tax reduces the amount you actually earn (or get to keep, if you prefer) from the CD.You generally don't have to pay taxes on interest you earn on CD IRAs until you take the money out of your IRA.
For more on your CD tax liability, see Rearrange Investments To Reduce Taxable Income If you paid a penalty for pulling out of a CD early, you may be entitled to a tax break.