I’m doing my taxes for a CD maturing in 2024. Why don’t I have the paperwork? Should I be concerned?

Seeking Certainty on CDs

Dear Seeking,

Now is the time to file your 2023 income taxes, so you won’t be the only person with such a question. 

Here’s the short answer: just because the bank’s certificate of deposit spans two years, it doesn’t mean it’s generating interest income in the first year. And if it’s not making interest income in the first year, that’s why you have not received a 1099 tax form.

If the interest is credited at maturity, you will receive a tax form for 2024 — not for 2023, said Ken Tumin, founder of DepositAccounts.com, a site to compare yields on CDs, savings accounts and other bank products.

Tumin is referring to the 1099-INT, the tax form that reports the interest paid annually to the account holder. Variations typically apply to CDs with terms up to one year, while longer term CDs report taxes on their interest annually.

If the payments occur regularly but are credited back on top of the principal, that still counts as a payment in the eyes of the Internal Revenue Service, Tumin said. Alternatively, the taxable event could come with an interest payment at the end, just as the CD matures, he added.

So where to find the fine print? The Truth in Savings Act requires specific disclosures in your contract, said Alice Frazier, president and CEO of Bank of Charles Town, headquartered in Charles Town, W.Va.”That will disclose how the interest is credited to the CD.”

A savings account always pays interest income on a regular basis, but the quirks on CDs might create an opportunity to delay income taxes for the strategic saver, Tumin said. “You basically defer taxes slightly that way,” he added.

A bank CD spanning two years might pay interest on a monthly or quarterly basis, prompting taxes in both years, Tumin said. Account owners might receive those payments, or they might be folded back into the principal. 

Interest from CDs treated as ordinary income

The IRS treats interest from CDs and other cash investments as ordinary income lumped together with income like job wages. In other words, it doesn’t get the preferential rates that long-term capital gains and qualified dividends can pull down.

Ordinary income is subjected to the tax brackets that run from 10% to 37%. Long-term capital gains and qualified dividends are taxed at 0%, 15% or 20%, and wealthy households face another 3.8% net investment tax on top of that.

CDs return principal and interest back at maturity, though people face penalties when pulling their money before the time period is complete. In another CD tax quirk, that early withdrawal interest penalty is deductible on your taxes.

Popularity of CDs have risen along with interest rates

There was $2.68 trillion sitting in CDs during the third quarter, up more than 10% on the previous quarter, according to the Federal Deposit Insurance Corporation. That accounts for 15.6% of the $17.15 trillion sitting in U.S. bank deposits.

Just before the Fed began raising its benchmark rate in the first quarter of 2022, there was $1.24 trillion in CDs, constituting nearly 7% of the $18.3 trillion in domestic bank deposits. The central bank raised the federal funds rate 11 times since March 2022 to cool inflation.

Last Sunday, Federal Reserve Chairman Jerome Powell said in a “60 Minutes” interview that he and his central bank colleagues are “actively considering” when to cut rates, but said they need to be careful instead of rushing.

“My colleagues and I are trying to pick the right point at which to begin to dial back our restrictive policy stance,” Powell said. “That time is coming.”

Whatever the tax rules may be, Frazier still sees the elevated consumer interest in CDs. In other words, the CD’s moment in the sun is not done. “It’s been a long time since people have seen rates this high,” she said.

Read also:

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I inherited a $300,000 bank account. When I pay taxes on the interest, would my spouse be entitled to a share of the account if we split?

Got a tax question? Write to me at [email protected].

(This question originally appeared on Reddit.)