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What Happens To Interest Forfeited When You Break A Cd

hank
hank   |     |   64 posts since 2016

I still have some cds earning as little as 1/75 for the next several years. I am thinking of withdrawing these early and put them into higher paying accounts. How is this reported to the irs? I don't want to pay taxes on interest that I never received. Does anyone know? How do you account for it on the tax return? Thanks



Answers
DAJunky
DAJunky   |     |   7 posts since 2016
The payor institution is required to report the early withdrawal penalty to the taxpayer on Form 1099-INT at the end of the tax year. Line 2 of this form contains the amount of the penalty. The amount of interest income earned during the year on the investment, prior to (early) withdrawal, is also reported on line 1 of the same form. In general, this interest should be included on your Form 1040, line 8a, and possibly Part I of 1040 Schedule B.

You then report (deduct) the 1099-INT early withdrawal penalty on the front of your tax return on Line 30 of Form 1040 to obtain adjusted gross income (AGI). Note you must file the long Form 1040 to claim this deduction because the line item is not found on the shorter Form 1040A or 1040EZ.

This information pertains to 2017 tax year.  New tax law will likely bring changes.
Ricochet
Ricochet   |     |   412 posts since 2010
Line 30 on IRS Form 1040 deducts as income adjustment
hank
hank   |     |   64 posts since 2016
thank you both for the information


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