Dear Liz: I have a savings account of $200,000 earning barely any interest. I would like to move it into certificates of deposit, but I’m afraid I’ll end up owing on my taxes. Would the interest I earn offset any tax liability?
Answer: Of course. The taxes you pay on would only be a portion of the interest you receive.
Let’s say your CDs earn 4% and you receive $8,000 each year. If you happen to be in the 12% federal tax bracket, the most you would owe would be 12% of the additional interest you’d earn, or $960. Most states tax income as well, so you might owe additional money — say $480 if you’re in the 6% state bracket. Even if you’re in higher brackets, you’ll still earn a lot more than any taxes you’d have to pay.
If you expect to owe $1,000 or more when you file your federal taxes, you typically should make estimated tax payments throughout the year. A tax pro can give you individualized advice.
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