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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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CD Interest, Bank 1099-INT Forms and Taxes

CD Interest, Bank 1099-INT Forms and Taxes

A reader asked me about when a bank is required to send a 1099-INT. Does the bank only need to send a 1099-INT for the tax year when the CD matures? The IRS Publication 550 has many of these details, but first it's easier to understand these issues if CDs are broken into certain categories.

There are two CD maturities to consider: 1) CDs with terms of one year and under, and 2) CDs with terms over one year.

Also, it's important to consider how interest is credited or paid. The two general methods include: 1) interest is credited to the CD monthly, quarterly or annually, and 2) interest is credited only at maturity.

When interest is paid, the CD holder may have arranged for the interest to be mailed to them as a check. The other option is for the interest to be added to the principal of the CD. The CD account holder is typically allowed to withdraw this interest without a penalty.

A bank will sometimes only credit the interest at maturity, but this is typically only done on short-term CDs with maturities of one year or shorter.

The answers on how the CD account holder and the bank should report the interest to the IRS is in the IRS Publication 550. This excerpt from page 6 provides some of these details:

Certificates of deposit and other deferred interest accounts. If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If interest is deferred for more than 1 year, see Original Issue Discount (OID), later.

So when interest is credited to the CD, this interest must be included in the person's income. Even if you don't receive a check, interest that is added back to the CD can be considered "entitled to receive without paying a substantial penalty." The bank should send out a 1099-INT form for the tax year when interest was credited. As stated in the above excerpt, "interest may be paid at fixed intervals of 1 year or less."

If the CD has a term of one year or less, there may be one single payment of interest at maturity. In that case, the bank may only send out a 1099-INT for the tax year when the CD matured.

The complication is when the CD has a term of over one year. The last sentence of the above excerpt references the section on Original Issue Discount (OID). In that section on page 13, OID is defined:

OID is a form of interest. You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer.

On page 14, more details are provided for CDs:

If you buy a CD with a maturity of more than 1 year, you must include in income each year a part of the total interest due and report it in the same manner as other OID.

So if the bank doesn't pay interest until the CD matures and the CD term is over one year, the bank should send out the form 1099-OID and the CD account holder must include this "phantom interest" or "imputed interest" in his or her income each year.

One well-known exception to reporting OID is the U.S. savings bond. This is the second example of exceptions listed on page 14. You don't have to worry about reporting savings bond interest until you redeem the savings bond or until it reaches maturity after 30 years. That's one nice advantage that savings bonds have over CDs.

If you have a question about your taxes, and what should be reported on them, it is a good idea to consult a tax professional who can help you navigate the rules.

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Apache   |     |   Comment #5
I have been round the block with certain banks and how they handle the CD interest.  What I was told if the interest is only taxable to you when it is accrued and paid.  Some one year CDs I have had only paid the interest at maturity so I only got the 1099 INT at that time to list for taxes since the interest was not available to me before then.  I now get longer term CDs and usually want the monthly or quarterly interest checks sent to my bank or mailed.  They have to send me the 1099 INT each year for these CDs since the interest is available to be and I must include it in income.  Just a note, make sure you get the info you need for any EWPs so you can deduct these penalties on your tax report.
Anonymous   |     |   Comment #6
ZICO   |     |   Comment #8
Thanks for the good explanation. This explains why Citibank Brazil sent me 10990-OID for a CD. In Brazil interest are paid only at maturity or redemption but Citibank reported the accrured interest at the end of the year as OID. This is bad news, but it is what it is. I see many people are reporting wrongly, mainly on CD issued by Foreign Banks who donĀ“t gnerate 1099-OID. Now, can someone explain if we claim the accrured TAX CREDIT (in this case, foreign tax credit)?
LuvCD   |     |   Comment #9
Do what you think is right, disclose everything, etc. Better to ask for forgiveness than permission. Go talk to a tax advisor
Danilo   |     |   Comment #10
My understanding is that you can claim a tax credit for an interest accrued in your Foreign CD even if you haven't paid it yet. Being a Brazilian CD, the tax return when you claim the credit could be under risk of being amended later due to a "Foreign Tax Redetermination" (see form 1116 instructions). 2 reasons: first because Brazil's tax varies from 15% to 22.5% according to your CD redemption date - so be sure to redeem later at the same foreign tax rate as you are claiming a credit now; second, if you CD foreign taxes are paid in foreign currency, the BRL to USD conversion you use this year (say at accrual date 12/31/2016) will not match the conversion when you actually pay the taxes on your 2016 CD income reported on 1099-OID (either at redemption or maturity. You can avoid these two sources of redeterminations by withdrawing your CDs before you file your tax return, so you'll get the final foreign tax and actual currency exchange rate on the date the taxes were paid.