topic Can early withdrawal penalty on CD be deducted from Interest paid in Retirement tax questions

Can early withdrawal penalty on CD be deducted from Interest paid

anil_sondhi — Mon, 23 Feb 2026 12:21:15 GMT

Re: Can early withdrawal penalty on CD be deducted from Interest paid

MonikaK1 — Fri, 17 Feb 2023 01:50:39 GMT

Yes, you can deduct the early withdrawal penalty - but only for a taxable CD. When you enter the interest income on Form 1099-INT, check the box beside 'My form has info in more than one box 1'. Then enter the penalty in box 2. That will reduce your adjusted gross income by the penalty amount.

For a CD that is held within an IRA, there is no taxable event and nothing to deduct.

Any early withdrawal penalties will be included in box 2 of your 1099-INT form from the issuing institution and clearly labeled “early withdrawal penalty.”

Re: Can early withdrawal penalty on CD be deducted from Interest paid

jkorloo — Sun, 24 Mar 2024 21:54:54 GMT

Do I deduct the Early Withdrawal Penalty shown in box 2 from Box and enter it into Turbo Tax or is there a place to enter the penalty in Turbo Tax?

Thnx

Re: Can early withdrawal penalty on CD be deducted from Interest paid

DoninGA — Sun, 24 Mar 2024 21:59:13 GMT

On the Form 1099-INT the early withdrawal penalty is entered in box 2.

On the screen for entering the interest there is a box to check labeled My form has info in more than just box 1

Re: Can early withdrawal penalty on CD be deducted from Interest paid

IntuitiveInvestor — Fri, 27 Feb 2026 10:38:25 GMT

Yes, if it’s a regular taxable CD, the early withdrawal penalty is deductible. The IRS allows you to deduct it as an adjustment to income, so you’re not taxed on interest you effectively gave back.

A few examples :

if you have a 12-month CD in a normal bank account and you cash it out early, the interest is taxable and the penalty is deductible.
if you have a 2- or 3-year CD and the bank reports interest each year, that interest is still taxable each year, and if you break it early, the penalty is deductible.
if the CD is inside an IRA, it’s different. Interest inside an IRA isn’t taxed annually, and you don’t deduct CD penalties separately because it’s all within the retirement account.

So the main thing is whether the CD is taxable or inside a retirement account.

For future CDs, it’s worth checking the early withdrawal terms before opening one. Some banks charge 3 months of interest, others 6 or more. Sites like CD Valet let you compare terms and penalties across institutions so you know what you’re getting into before committing.

Hope that helps.