What type of reporting form did you received for cashing in the CD?  Is it shown on a 1099B?

The interest on the CD would be taxable income.  Who gave you the CD?  Did you inherit it?  Did you get a 1099R for it?

My Mother-in-law gave it to us, I'm most concerned with them taxiing 25%+ on it, Trying to pay off debts doesn't really feel like income to me!

Why are you entering it into your tax return?  And how/where?  Did you get some kind of 1099 form for it?  Did the bank give you a form?

Our tax preparer said we have to claim it as income. Don't know where we go from here/

As the answer below says you do not report gifts on your tax return and gifts are not taxable.  From what you've said it is not taxable.  There must be more details.  Ask your tax preparer why it's taxable.  Did your mil take it out of a IRA or some kind of retirement account?  Did she sell something?  Was this a regular Desktop CD/Download program like at a bank or Credit Union?

Oh, tell us about the loan you paid off.  Maybe that has to do with it.

If you have a tax preparer, maybe you should get them to explain it to you better.  The limited information youre giving here, doesn't sound like a taxable event.

He explained that paying off a debt was considered income and needed to be taxed.

that doesn't sound correct.   again, what type of document did you received from the bank that held the CD that was cashed? (just to verify, you're referring to a CD - Certificate of Deposit?)

You or he are missing something or not providing us with something

A gift is not taxable income, nor is paying off a loan.