early withdrawal penalty on my cd

[vfurigay]

hello,

I got 1099 INT  for my cd for year 2023.  However, I redeemed and withdraw the amount before it matures this early of 2024. My question is can I deduct the interest penalty for 2023 as they took out almost 6 months of last year interest (2023) with the amount that I got back. Please  help. My 1099 Int for 2023 does not show the penalty for early withdrawal.

Thank you

[VolvoGirl]

Yes it should be in box 2.  Ask the bank about it.  

[rjs · Accepted solution]

If I understand you correctly, you made the early withdrawal in 2024. If so, the penalty will not be on your 2023 Form 1099-INT because you didn't pay it in 2023. You paid it in 2024. For the same reason, you cannot deduct the penalty on your 2023 tax return. You will have to deduct it on your 2024 tax return because that's the year that you paid it. You should get another 1099-INT for 2024 showing the early withdrawal penalty, even if it doesn't show any interest. You will be able to enter that 1099-INT in your 2024 tax return.

[IntuitiveInvestor]

Since you withdrew the CD in early 2024, the penalty happened in 2024, not 2023. That’s why it doesn’t appear on your 2023 1099-INT and why you can’t deduct it on your 2023 return.

Even though it may feel like they took back interest from 2023, the actual early withdrawal penalty was charged in 2024. For tax purposes, the deduction follows the year the penalty was imposed.

You should see the penalty reflected on your 2024 1099-INT, and that’s when it becomes deductible.

If you’re looking at CDs in the future, it can also help to compare options ahead of time. CD Valet is a CD marketplace that lists over 40,000 CD rates from federally-insured banks and credit unions across the U.S., which can make it easier to see what’s out there before committing to a term.