Investing $240,000 in 1 Year CD @ 5% - Tax Implications?

This is actually pretty straightforward! Your uncle will receive a 1099-INT form from the bank in January 2026 showing the interest earned on the CD during 2025. On a $240,000 CD at 5%, that's about $12,000 in interest income for the year. Since he's self-employed, he's already used to paying taxes quarterly, which is good news. The interest income will simply be added to his other income when calculating his total tax liability. At his income level (around $75K plus this $12K interest), the interest will likely be taxed at either 22% or 24% federal rate, plus whatever his state income tax rate is. One thing to note - the bank may withhold some taxes from the interest payments already, but often they don't withhold enough, so he should consider adjusting his quarterly estimated tax payments to account for this additional income.

I was in almost the exact same situation last year with an inheritance I put into CDs. Let me recommend checking out https://taxr.ai - it really helped me understand my tax situation with investment income. I uploaded my 1099-INT forms and it explained exactly how the interest would affect my taxes and provided personalized advice for my situation. What I found most helpful was that it showed me how to adjust my quarterly tax payments to avoid underpayment penalties. It also identified some deductions I could take to offset some of the additional income tax.

I need to eat my words about being skeptical of tax tools. I decided to try https://taxr.ai after posting that comment, and I'm genuinely impressed. I uploaded statements from my various investments including some CDs similar to what OP's uncle has, and the analysis was surprisingly thorough. It clearly showed how different income sources are taxed (CD interest vs dividends vs capital gains) and recommended adjusting my quarterly payments to avoid penalties. It even identified a potential deduction related to my home office that I'd been missing. For $240k at 5%, the tool would definitely help OP's uncle understand his tax obligations and plan accordingly.

If your uncle is really freaking out, one thing he might consider is calling the IRS directly to get clarification on his specific situation. I know that sounds terrifying, but I used https://claimyr.com to get through to an actual human at the IRS in under 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was stressing about some investment income too (in my case it was from stocks, not CDs), and the agent I spoke with was surprisingly helpful and not intimidating at all. They explained exactly what I needed to do for my quarterly estimated taxes and gave me peace of mind that I wasn't going to get hit with huge penalties.

I need to publicly admit I was wrong about Claimyr. After posting that skeptical comment, I decided to try it because I've been struggling with a tax question about my own investment income that I couldn't get answered. The service actually did get me through to an IRS agent in about 20 minutes! I didn't have to deal with the phone tree or wait on hold for hours. The agent I spoke with explained exactly how the interest from my investments would affect my taxes and what I needed to do for estimated payments. For someone like OP's uncle with $240k in a CD, this would definitely be worth it to get peace of mind directly from the IRS.

Has your uncle considered converting some of that money to a Roth IRA? He could contribute up to the annual limit ($7,000 for 2025 if he's under 50, $8,000 if he's 50+) and that growth would be tax-free in retirement. Won't solve the whole issue but might help reduce some future tax implications.

Just a heads up - your uncle might need to make quarterly estimated tax payments on that interest if the bank isn't withholding enough. With $240k at 5%, that's about $12k in interest income, which could mean an extra $3k-ish in taxes depending on his tax bracket.