Can CD Early-Withdrawal Penalties Be Claimed on Taxes?

Early withdrawal penalties are often tax-deductible.

Early withdrawal penalties are often tax-deductible.

If you own certificates of deposit (CDs) or other time deposit accounts, you generally can't remove the money before the maturity date. If you do, the CD issuer slaps you with a fat penalty, which in some cases is more than you earn in interest. But there's a bright spot — a tax break for early-withdrawal penalties on certificates of deposit (CDs). And it doesn't even require having to file a lot of extra forms.

Form 1099-INT

If you own any interest-bearing deposit accounts (or investments), you should receive a Form 1099-INT in late January for the amount of interest paid the previous tax year. Nowadays, most banks or investment companies don't mail them, so you'll need to access the form on their website. The form indicates the amount of interest paid in Box 1. If you withdrew money early and incurred a penalty, you'll find that in Box 2.

Which Forms to File

If you only have interest income and no dividends, you can put the amount of interest income on line 9a of Form 1040 or 1040NR. You cannot use Form 1040A or 1040EZ if you have an early-withdrawal penalty. Interest income earned is found in Box 1 of the Form 1099-INT issued by the bank, broker or investment company. Put the full amount of Box 1 on the correct line. The amount of the penalty from Box 2 goes on line 30 of your Form 1040. List the full amount, even if it is more than the interest income received for this security. The difference is an adjustment to income (which, effectively, is a credit).

Exceptions

You won't be able to make any claim for early-withdrawal penalties for money invested in a retirement account. Those investments are tax-deferred, so you'll end up paying any tax owed on the amount you withdraw once you reach retirement age, regardless of whether you had fees or penalties on any of the investments in the intervening years. Also, you can't take an adjustment for non-interest-related penalties on line 30 of your Form 1040. That deduction is reserved for early-withdrawal penalties in Box 2 of Form 1099-INT.

Other Investment-Expense Write-Offs

You can take a deduction for investment-related expenses, such as safety-deposit boxes, research expenses, subscriptions to financial publications, and other reasonable and necessary expenses incurred in producing investment income. These deductions are taken in Schedule A of Form 1040, and must be more than 2 percent of adjusted gross income. That means you can only deduct the amount greater than 2 percent, so you'll need to have enough other deductible investment expenses to itemize, rather than take the standard deduction for your filing status.

 

About the Author

Naomi Smith has been writing full-time since 2009, following a career in finance. Her fiction has been published by Loose Id and Dreamspinner Press, among others. She holds a Master of Science in financial economics from the London School of Economics and a Bachelor of Arts in political economy from the University of California, Berkeley.

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