Interest Penalty on Early Withdrawal of Savings

Interest Penalty on Early Withdrawal of Savings

If money in a time savings (such as a certificate of deposit) is withdrawn before maturity, interest may revert to a lower rate for the year of withdrawal and there may also be a period when no interest is paid. The difference (the amount of interest forfeited) will be reported as an early withdrawal penalty in Box 2 on Form 1099-INT or similar statement. It's possible that the penalty could be more than the gross amount of interest reported in Box 1.

The interest penalty is entered on line 30, Form 1040, ans is subtracted from total income. Form 1040A cannot be used. The interest reported on Form 1099-INT is the amount that was received for the tax year up to the date of withdrawal.