When is interest on a CD reported to the IRS?

[Juancar]

Thank you for your responses.

So, the part in pub 550 -- pg 20 -- that says 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. is not applicable to my case? 

Here is another link someone else included in a different threat. 

https://www.goldinglawyers.com/how-does-the-irs-tax-foreign-certificate-of-deposit-interest/#:~:text...

@AmyC

If I decide to to pay interest to the IRS for the 11 months that the CD was open in 2024 and then in 2025 for the 7 remaining months, will that cause and issue with IRS ?? I simply would like to do the right thing and feel secure that I wont be penalized or audited.

Again, all interests in my CDs are not paid until maturity (whether they were 12 months or 18 months).

[DaveF1006]

No. That should not cause any issues with the IRS.  You are simply reporting interest as it accrues and not when it is paid, which is required for a overseas CD according to this link. You should not be audited.

[Frank nKansas]

This question doesn't necessary refer to the foreign account scenario...

If tax is paid for the year in which it was accrued, but not paid, would it be correct to assume there would not have been a 1099-INT issued?  Therefore how do you reference that accrued interest in your return?  

And if a 1099-INT was not issued for a year in which you declared the accrued interest, how do you explain the difference between the full amount of interest actually paid as shown on the 'final' 1099-INT issued at the time of maturity vs. the smaller amount accrued and paid in the tax year?  

[DianeW777]

If interest is reported as income on your tax return each year as it accrues, then you will reduce the amount on a 1099-INT that is received in the year of redemption or maturity, by the amount already claimed in prior years.

@Frank nKansas  

[Frank nKansas]

If the financial institution does not issue a 1099-INT until the CD reaches full maturity, and you declare interest accrued annually during the life of the CD, you would have no 1099-INT to reference when you file.  And the amount shown on the 1099-INT issued at maturity would not match the amount you declared in the final year, 

What form do you use or how do you document the discrepancy?

[MonikaK1]

If you receive a 1099-INT that includes income already reported in a previous tax year, enter the 1099-INT as is. When you get to the follow-up screen, you can adjust the interest entered and enter an explanation.

This can be done in the section where you entered the interest. When you get to the follow up question about uncommon situations, select that you need to adjust the interest (see screenshot below) 

Another screen appears where you can choose a reason for the adjustment (see screenshot below):

@Frank nKansas 

[Frank nKansas]

Thanks!  I have never had to do that.  I have always waited, incorrectly, until the 1099-INT arrives.

Good to know!

thanks again!

[baldietax]

I wouldn't overcomplicate CDs - tax is paid in the year the interest is paid (which in the case of bank CDs is often paid and compounded to the CD account) and reported on 1099-INT.  You should not need/want to pay tax on the accrued interest without a 1099, and doing so effectively reduces your yield which assumes compounding/reinvestment of interest payments until maturity.

The references to Pub 550 "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."

.... this section is referring to OID - Original Issue Discount.  In the CD space this would apply to brokered CDs which are issued and traded on secondary market like bonds, if they happen to be issued at discount.  Bank CDs don't have this feature.  This has nothing to do with the interest paid due to the coupon on the CD.

[baldietax]

actually I may not be correct that the pub550 reference only applies to discount, it's in the OID section but seems to refer more generally to interest on these instruments but lumping the topic under OID.  Either way I think you should receive a 1099 for it.  Ally for example on their multi year Bank CDs will pay interest annually on 12/31 regardless of anniversary of the CD, and generate a 1099-INT.