Investors Are Finally Making Money on Bonds and CDs. Be Prepared to Pay Taxes.

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earning 5%, that’s $5,000 in interest and potentially $1,500 in taxes. Whether you’re investing in a high-yielding money-market account, a certificate of deposit, or an I Bond, there are different tax rules. You might owe federal income taxes or state income taxes or both.

You might owe taxes this year, next year or decades from now. Your tax bracket and your state of residency come into play. These tax considerations affect people in taxable accounts rather than tax-deferred retirement plans such as IRAs and 401(k)s.

Earning more investment income in taxable accounts can push you into a higher tax bracket and cause unintended consequences, said Dan Griffith, director of wealth strategy at Huntington Private Bank in Canton, Ohio. For lower-income people, that could mean getting taxed on Social Security benefits. For higher-income people, that could mean facing the 3.8% net investment income tax that applies once your adjusted gross income is above $200,000 for most single filers or $250,000 for most married couples.

Here are the tax details on various fixed income investments. I bonds. Investors flocked into these inflation-adjusted U.S.

savings bonds last year when they were earning a 9.62% annual rate, and they’re still buying them even though the rate is now 4.3% for new purchases. There are no state or local taxes on the interest earned, which is a benefit for investors in high tax states. Generally, I bonds aren’t taxed at the federal level until you cash them in.

There is an option to pay the federal income tax annually. In certain cases, you may be able to exclude all or part of the interest from federal income taxes if you use the proceeds to pay for higher education. Certificates of deposit.