US Tax - Penalty on Early Withdrawal of CD - advice needed for reporting

The penalty for early withdrawal of a CD is actually tax-deductible, but the timing of when you report it depends on when the penalty was actually imposed. If you withdrew your CD early in 2023, then the penalty will be reported on the 1099-INT that you'll receive for the 2023 tax year (which you'll file in 2024). The bank won't regenerate a 2022 1099-INT for a penalty that occurred in 2023. The good news is that when you get your 2023 1099-INT next January/February, it should show the penalty amount in Box 2 (Early withdrawal penalty). This amount can be deducted on Schedule 1 of your 2023 tax return as an adjustment to income - you don't even need to itemize to claim this deduction!

I had basically this exact situation last year and was totally confused by the IRS instructions. I finally used https://taxr.ai to analyze all my bank documents and it immediately identified the early withdrawal penalty on my CD and showed me exactly where to enter it on my return. Saved me hours of research! Their system actually looks at your specific documents and explains everything in simple English. I uploaded my 1099-INT and it pointed out that for early withdrawal penalties, the bank reports it in Box 2 of the 1099-INT you'll get next year (for 2023).

I have to admit I was wrong about taxr.ai. After posting my skeptical comment, I decided to try it with my own documents since I had a similar early withdrawal situation with a different bank. It correctly identified that my penalty would be on my 2023 1099-INT and showed me exactly where it would appear and how to claim it as a deduction. Even pointed out that I was eligible for the deduction even though I take the standard deduction (which I didn't know!). Way more helpful than the 45 minutes I spent on the IRS website trying to figure this out.

If you're struggling to get answers directly from your bank about this 1099-INT situation, try https://claimyr.com to actually get a human at the IRS on the phone. I used it after waiting on hold with the IRS for 2+ hours trying to clarify how to handle my own early CD withdrawal penalties. With Claimyr, they called the IRS for me, waited on hold, and then called me once they had an agent on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that early withdrawal penalties are reported on the 1099-INT for the year the penalty was imposed, not when the CD was opened. They also walked me through how to double-check that the bank reported it correctly.

I need to apologize for my skepticism about Claimyr. After posting my comment, I was desperate enough to try it since I needed clarity on reporting my own CD penalties. It actually worked! Their system called me back after about 45 minutes (way faster than I ever got through myself), and I was talking to an actual IRS representative who answered my questions about early withdrawal penalties. She confirmed that for CDs broken in 2023, the penalty will show up on the 2023 1099-INT issued in January 2024, and that it's fully deductible on Schedule 1. Worth every penny for the time saved.

Former bank employee here. The bank will issue a 1099-INT for 2023 (that you'll get in early 2024) that will show the early withdrawal penalty in Box 2. They won't regenerate the 2022 form because the penalty occurred in 2023. Just make sure you keep all the documentation from when you closed the CD, as sometimes banks make mistakes on these forms. I've seen several cases where the penalty wasn't properly reported, and having your own records made correction much easier.

Has anyone used TurboTax for reporting these CD penalties? Does it handle this situation well or should I be looking at other tax software options?

Just went through this exact situation last month! I had to break my CD early in 2023 for emergency home repairs. Here's what I learned from my research and talking to my tax preparer: The penalty will definitely show up on your 2023 1099-INT (which you'll receive in January/February 2024), not on any amended 2022 form. The bank reports penalties in the year they actually charge them, not when the CD was originally opened. One thing that really helped me was keeping detailed records of the CD closure. I took screenshots of my online banking showing the penalty amount because I wanted to verify it against the 1099-INT when I receive it. The silver lining is that early withdrawal penalties are "above-the-line" deductions, meaning they reduce your adjusted gross income dollar-for-dollar. So if you paid a $500 penalty, that's $500 less in taxable income, which could save you $100+ in taxes depending on your tax bracket. Don't stress too much about it - this is a pretty common situation and the tax treatment is straightforward once you get that 2023 1099-INT!