TBill and CD Note
For all of you that took advantage of the high T-Bill interest rates and CD rates I wanted to post a reminder about a potential tax issue next year when I do your tax return.
CD interest is taxed as ordinary income, which means it is taxed at your regular income tax rate. The tax rate you pay will depend on your income bracket. For example, if you are in the 22% tax bracket, you would pay 22% of the interest earned on your CD.
TB interest is also taxed as ordinary income. However, there is a special rule that allows you to exempt up to $100 of TB interest from federal income tax. This rule applies to single filers and married couples filing separately. If you are filing jointly, you can exempt up to $200 of TB interest.
To claim the exemption for TB interest, you must report the interest on your tax return. However, you do not have to actually pay taxes on the first $100 ($200 if filing jointly) of interest.
Here are some additional things to keep in mind about the taxation of CD and TB interest:
- The interest is taxed in the year it is earned, even if you do not receive the money until a later date.
- If you withdraw money from a CD before the maturity date, you may have to pay an early withdrawal penalty. This penalty is typically a percentage of the interest earned on the CD.
- If you sell a TB before maturity, you may have to pay capital gains taxes on any gains you realize.
The name of this game is save some of the earnings for the tax man next year and this windfall will not be a problem.