I incurred an earl withdrawal penalty fee for a Certificate of Deposit (CD) account. Am I paying taxes on the penaltyportion?

[MinhT · Accepted solution]

No, you do not pay taxes on the early withdrawal penalty as you can deduct it for a taxable CD.

When you enter the interest income on Form 1099-INT, check the box next to 'My form has info in more than one box 1'. Then enter the penalty amount in box 2. This will reduce your interest income by the penalty amount.

[varunagrawal]

Thank you - I had FDs (also known as certificate of deposit) in India. These FDs provided monthly interest payouts (thats how I requested) and I was reporting this interest income every year.
But last year I chose to do early maturity (pre-maturity) as I needed the funds. This resulted in me getting an amount less than the principal (because of penalty charges).
So, for example, if I had a INR 100,000 certificate of deposit for 6% interest (monthly payout) for 5 years, I was reporting the INR 6000 every year. Because I wanted to withdraw the principal before maturity, I received say INR 95,000, a INR 5000 loss.
How is this 'loss' to be reported? Can it be used to reduce total interest income from other FDs? If possible, I would like to read more about it. Thanks.

[AmyC]

You can deduct early withdrawal penalties. Enter your early withdrawal penalty on line 18 of the 2021 Schedule 1, located in Part II of the schedule, "Adjustments to Income." Total all of your adjustments to income from Part II on line 26 of the schedule, and then transfer this sum to line 10a of your 2021 Form 1040.

It reduces your taxable income

@varunagrawal

[varunagrawal]

Thank you for your comprehensive reply!

[oldfogie]

Turbo Tax 2022 does NOT subtract the early payment penalty on CDs from the Interest.

[SteamTrain]

@oldfogie 

Don't know about other years, but check your form 1040, line 10..

.....that's where it's subtracted from income on the 2022 tax return.

(Actually, it's on Schedule 1, line 18 if you happen to have other subtractions, i.e. line 10 of the 1040 could be greater than expected)

[Critter-3]

It will not reduce the income directly ... it is an adjustment to income instead.