Early Withdrawal Penalty

A time deposit savings account, certificate of deposit (or CD) is a special type of time deposit generally offered with a fixed rate return for a specified period of time. CDs are one of the safest investment routes out there. These accounts pay interest to you on the money invested, much like a regular savings account, however the rate of return is much higher because you agree to keep this money invested for a certain period of time.

Getting a CD is fairly easy; just consult with your banking institution or credit union. You just need to inform them that you would like to buy a CD, fill out some paper work, and then let your CD mature.

Should you decide to withdraw from this account prior to the mature date, a penalty is charged. This penalty if reported to you in box 2 of form 1099-INT. This penalty is deductible as an adjustment to your Gross Income. To do this, you must report your gross interest that would have been paid to your account during the tax year without the penalty on Line 1 of Schedule B. Then simply deduct your penalty amount on Line 32 of form 1040. Please note you may not claim this deduction on form 1040EZ or 1040A.