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Is Early Withdrawal Penalty Tax Deductible?

Many taxpayers have their money saved up in a CD account or a retirement account. When they withdraw the money prematurely, they are hit with penalty and tax. While having to pay both tax and penalty for early withdrawal on an IRA account or a CD account, most taxpayers don't know that the penalty on early withdrawal of savings is actually tax deductible. Below are common questions on early withdrawal penalty and tax deductions.

  • Is early withdrawal penalty on CD acct tax deductible?
  • Is early withdrawal penalty tax deductable?
  • What are the tax and penalty for early withdrawal on an IRA account?

Below are the rules on how early withdrawal penalty is tax deductible.

If the taxpayer forfeited interest income because of early withdrawal of time deposit such as in the case of a CD accout, then the IRS allows a tax deductible amount shown on the tax form 1099-INT in box 2. This tax deductible penalty on early withdrawl is reported on line 30 of tax form 1040.

Is Early Withdrawal Penalty Tax Deductable

How much of the early withdrawal penalty is deductible?

The entire penalty from early withdrawal is deductible even if the penalty exceeds the interest income. Deducting penalty from early withdrawl is something that most taxpayers are not aware of.