How to deduct CD Early withdrawal penalty on taxes when bank won't issue corrected 1099-INT?

But what if the bank doesn't list the penalty amount correctly on this year's 1099-INT? My bank did something similar and the amount in Box 2 didn't match my actual penalty. Also, do you know if there's a limit to how much you can deduct? Like if my penalty was over $3,000?

If the amount in Box 2 of your 1099-INT doesn't match the actual penalty, you should first try to get the bank to issue a corrected form. If they refuse, keep detailed records of your actual penalty amount and use that figure on your tax return. Include a brief explanation with your tax return if the amount you're claiming differs significantly from what's reported on the 1099-INT. There's no dollar limit on the early withdrawal penalty deduction. You can deduct the full amount of the penalty, regardless of how large it is. The IRS treats this as an adjustment to income rather than an itemized deduction, which is actually better for most taxpayers.

That sounds interesting but kinda too good to be true. How does it actually know what's a penalty vs regular interest? And does it work with all tax software or just certain ones? My situation is with a credit union if that matters.

Did you need to upload your actual statements? I'm hesitant to share all my banking info with random websites. Could you just manually enter the figures instead? My bank's being equally unhelpful with my CD penalty.

It identifies penalties by analyzing the transaction descriptions and patterns in your statements. The system recognizes terms like "early withdrawal fee" or "CD penalty" and other common banking language. It works as a complement to any tax software - you use the guidance it provides when filling out your return in TurboTax, H&R Block, or whatever you use. You can definitely manually enter the figures instead of uploading full statements. The site lets you choose what information to share. I was initially concerned about that too, but they have pretty solid security practices and don't require full account numbers or anything. Just the relevant transactions and documentation related to the CD penalty.

Wait, how does this actually work? Does it just call the IRS for you? I'm confused about how a service can get through faster than I could myself.

Yeah right. The IRS never answers their phones these days. I've spent literally 5+ hours on hold multiple times this year and got disconnected each time. No way this actually works as advertised.

It doesn't just call for you - it uses a system that continuously redials and navigates the phone tree until it gets through to an agent. Then it connects that agent to your phone. It's like having someone dedicated to staying on hold for you until they reach a person. The reason it works better than calling yourself is that they have multiple lines trying simultaneously, and they know exactly which prompts to select for fastest service. Plus, you don't waste your time - you get a callback only when an actual human is on the line. I was skeptical too until I tried it for my CD penalty issue, but I was able to speak with an IRS agent who confirmed exactly how to handle the deduction.

Do you know if you need to amend last year's return too since some of the interest was reported in the previous year? That's the part I'm most confused about.

Based on my experience, you don't need to amend last year's return. The IRS allows you to take the full penalty as a deduction in the year it was charged, even if some of that interest was reported in a previous year. This is actually simpler for everyone involved - you just take the full deduction this year rather than having to go back and amend previous returns. The key is documenting the total penalty amount properly so you can justify the deduction if questioned.

That's actually a completely different situation tax-wise. For an IRA early withdrawal, the 10% IRS penalty is reported on Form 5329 and isn't deductible - it's an additional tax. Any bank penalty specifically for breaking a CD within the IRA would typically just reduce the amount distributed from the IRA, so you'd pay tax and potential penalties only on the net amount you received. No separate deduction would be available since the IRA already has special tax treatment.

This is really helpful documentation advice! I'm dealing with a similar situation right now and was worried about not having the "official" corrected 1099-INT. Did you include copies of all those documents with your tax return, or just keep them in case the IRS asked for them later? I have screenshots and email correspondence but wasn't sure if I should send everything upfront or just the brief explanation statement you mentioned.