How to Pay Taxes on a Redeemed Certificate of Deposit

by Karen Farnen

Certificates of deposit are taxed as the interest is earned. The Internal Revenue Service taxes the interest even if you leave the money in the account. CDs held in a retirement account, however, are tax-deferred; in the case of a Roth IRA, your interest grows tax-free. Financial institutions simplify your task of paying the taxes you owe by reporting your interest on 1099 forms, which are filed annually with the IRS. Whenever you redeem a CD, you’ll need to claim any interest earned for the year on your taxes.

1. Identify the total taxable interest for your redeemed certificate on the Form 1099 that you received from your financial institution. Add any other taxable interest you earned from other interest-bearing accounts. If you did not receive 1099 forms, look up your interest on the year-end statements from your banks or credit unions. Interest income is taxable even if you did not receive a 1099.

2. Select the IRS income tax form appropriate for your situation. If you have more than $1,500 in taxable interest for the year, you’ll need to file Form 1040A or 1040. If you paid a penalty for early redemption of a CD, use Form 1040. In addition, select Schedule B if your interest exceeds $1,500. Income from certain other investments may also require you to file Schedule B. Some examples are accrued bond interest and interest from seller-financed mortgages.

3. List your interest income on Schedule B if required for your situation. List each savings institution by name and enter the amount of interest from your 1099 form or statement. Total the interest amounts on line 2.

4. Record the total of your interest for the year on line 8a of Form 1040 or 1040A. Enter this amount on line 2 if you are using Form 1040EZ.

5. Deduct the penalty you paid if you redeemed your CD early. Find the amount in box 2 of your 1099 form and write it on line 30 of Form 1040.

6. Complete and mail in your Form 1040, 1040A or 1040EZ tax return with Schedule B and other supporting documents. Do not mail in the 1099 forms; keep these documents for your records.


  • Save your bank statements and 1099 forms in a special folder to make tax preparation easier.
  • Deduct the entire early-redemption penalty on a CD, even if it exceeds your interest.


  • Do not subtract a penalty for early redemption from your CD interest before reporting it on your 1040 or Schedule B. You must declare the entire amount and then deduct the penalty on line 30 of your 1040.

Items you will need

  • 1099 form
  • End-of-year account statements
  • IRS Form 1040, 1040A or 1040EZ
  • IRS Form 1040, Schedule B

Photo Credits

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