Do You Have to Pay Taxes on a CD If You Are the Beneficiary?

A certificate of deposit (CD) can be passed to a beneficiary after the original account holder’s death. While it may feel like an inheritance, tax obligations still apply. Understanding these responsibilities helps avoid unexpected liabilities.

Estate and Inheritance Taxes

When a CD transfers to a beneficiary, estate and inheritance taxes may apply based on the deceased’s total assets and state laws. The federal estate tax affects only estates exceeding $13.61 million in 2024, meaning most individuals will not owe this tax. However, some states impose their own estate taxes with lower exemption thresholds. For example, Oregon and Massachusetts tax estates above $1 million, which could impact beneficiaries receiving CDs as part of a larger inheritance.

Inheritance taxes, separate from estate taxes, are levied in six states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Unlike estate taxes, which are paid by the estate, inheritance taxes are the beneficiary’s responsibility. Rates vary based on the beneficiary’s relationship to the deceased. In Pennsylvania, direct descendants pay 4.5%, siblings owe 12%, and unrelated heirs face 15%. Some states provide exemptions for spouses or children, reducing or eliminating the tax burden.

Interest Income Liability

Any interest earned on a CD before and after the original account holder’s death is taxable. Interest accrued before death but not yet paid out is classified as “income in respect of a decedent” (IRD) and is subject to federal and possibly state income taxes. The financial institution will issue a Form 1099-INT to the beneficiary detailing the interest earned.

If the CD continues to generate interest after being transferred, the beneficiary must report this income on their tax return. CD interest is taxed as ordinary income, subject to standard federal tax brackets ranging from 10% to 37% in 2024. Some states also impose income taxes, which could further impact tax liability.

If the CD was held in a tax-advantaged account, such as a traditional IRA, withdrawals follow standard IRA distribution rules. Roth IRAs allow tax-free distributions if the account has been open for at least five years. The type of account determines how the CD is taxed.

Documentation Requirements

Proper documentation is necessary to claim a CD as a beneficiary. Financial institutions typically require a certified copy of the original account holder’s death certificate to verify the passing and begin the transfer process.

If the CD had a payable-on-death (POD) designation, the beneficiary must provide a valid government-issued ID and complete the bank’s claim form. If the CD was part of a probate estate, a court-issued letter of testamentary or letter of administration may be required, granting the executor or administrator authority to distribute assets.

Banks often request a completed IRS Form W-9 from the beneficiary for tax reporting. This form provides the recipient’s Social Security number or taxpayer identification number, which the bank uses to issue tax documents for future earnings on the CD. Non-U.S. citizens may need a Form W-8BEN to establish foreign tax status and determine applicable withholding rules.