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Category: Adjustments

Penalty on Early Withdrawal of Savings

If you withdraw funds from a Certificate of Deposit (CD) or other deferred interest accounts before maturity, you may be charged a penalty by the financial institution holding the CD. The Form 1099-INT or similar statement provided to you by the financial institution will show the total amount of interest in Box 1 and will show the penalty separately in Box 2. You must include in income all interest shown in Box 1. You can deduct the penalty (even if it is more than your interest income) on Form 1040, Line 30.

Certificates of Deposit, which are sold by banks or other financial institutions, are low-risk investments suitable for cash if you do not need the money for several months or years. Federal law requires a minimum penalty of interest for an early withdrawal of an account but they do not set a maximum penalty. This means that banks and other financial institutions, can charge a higher penalty rate for an early withdrawal of a Certificate of Deposit or other deferred interest account before it has fully matured.

To locate the area to deduct this early withdrawal penalty of savings, please access your TaxSlayer account. Once you have logged into the account, select Federal Section located on the navigation bar at the top of the page. Next, on the sub-navigation bar, select Deductions>>>Enter Myself>>>Adjustments>>>Penalty on Early Withdrawal of Savings.

For additional information regarding this penalty, please refer to IRS Publication 550.