Income tax on CDs?

Question

Will the government tax (income tax) me on the interest that I obtain from my CD?

And let say I have two accounts - one for CD and the other for mutual fund, and have the same amount of principal and same interest rate on both accounts. Will the government tax (income tax) me more on one of the two accounts, or will they both be taxed the same rate?

Answer 1

Yes, you have to report the interest income that you earn on a CD, and pay income tax on it. You should receive a statement from the bank telling you the amount, as long as you earned over $10.

A mutual fund doesn't pay "interest." Your earnings on a mutual fund are considered capital gains, which are taxed at different rates depending on whether you own them for less or more than a year. If you earn it for less than a year you will pay a tax rate higher than what would have been your tax rate on CD interest. If you sell it after owning it for longer than a year, I am not sure of the rate - it has changed since I last bought/sold a mutual fund.

Answer 2

The answers so far are only partially correct. Interest on a CD is taxed as ordinary income - the same as wages. A mutual fund does not pay interest, but pays ordinary dividends, qualifying dividends and capital gains distributions, or any combination of the three. Qualifying dividends and capital gains distributions may be taxed at a lower rate than plain old interest fro a CD.

Answer 3

W. Paul C. is mostly correct. He said that gains on mutual funds owned less than a year are taxed at a higher rate than interest on CDs. Actually, both would be taxed at the same rate as wage income. Any long term capital gains are taxed at a maximum rate that is less than the maximum for regular income.

Answer 4

If the mutual fund pays dividends, they may well be "qualifying dividends". In that case, the tax rate would be less than that on a CD.