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Repair Windows errors before they cause bigger problemsFix Now →Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Yes. For a qualifying early-withdrawal penalty on savings, report the full interest amount shown in Form 1099-INT, box 1, as income, then claim the penalty separately as an adjustment to income on Schedule 1 (Form 1040), line 18. The IRS generally says the financial institution reports the penalty in box 2. This is federal tax guidance; state treatment may differ.
How to report the interest and penalty
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Check your tax statement. A bank or other financial institution generally reports the early-withdrawal penalty in Form 1099-INT, box 2. Confirm the amount against your account records and contact the institution if the statement appears incorrect.
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Report interest without subtracting the penalty. Include all interest reported in Form 1099-INT, box 1, as interest income. Do not report only the amount left after the penalty.
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Claim the penalty separately. Enter the qualifying penalty as an adjustment to income on Schedule 1 (Form 1040), line 18, following the instructions for the tax year you are filing.
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These are the IRS instructions in Publication 550, Investment Income and Expenses. They describe the federal treatment; they do not determine whether a particular institution’s statement is accurate or address your full tax situation.
If the forfeiture is reported on Form 1099-OID
For an early-withdrawal forfeiture of interest or principal on an obligation reported on Form 1099-OID, Publication 550 says the deductible amount is shown in box 3. Check the current-year form instructions to determine how to report it.
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Do not confuse a savings penalty with an early retirement-distribution tax
The deduction applies to a qualifying penalty for withdrawing savings early, such as from a CD or deferred-interest account. It does not apply to the additional 10% tax that may be imposed on an early distribution from a qualified retirement plan. The IRS explicitly distinguishes that retirement-plan tax from a penalty for withdrawal of savings in its early-distribution tax guidance. Retirement distributions have their own reporting rules and possible exceptions.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Check the rules for the tax year you are filing
Tax forms and line references can change. The IRS forms index lists Publication 550; check the publication and Schedule 1 instructions for the year on your return rather than assuming a line reference remains unchanged. State income-tax rules were not established by the federal guidance cited here, so do not assume they match federal treatment.
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If the amount or classification on your statement is unclear, ask the financial institution to explain it. For unusual circumstances or questions about how the item affects your return, consult a qualified tax professional.
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