What this line means
The penalty your bank or financial institution charged you for withdrawing funds from a time deposit (such as a CD) before its maturity date. This penalty is reported to you in Box 2 of Form 1099-INT or Box 3 of Form 1099-OID. Even though the bank deducted the penalty from your interest, you must report the full interest on your return and then deduct the penalty here as an adjustment to income.
Does this apply to you?
- You cashed out or broke a certificate of deposit (CD) before its maturity date
- You withdrew funds early from a time savings deposit and your bank charged a penalty
- Your Form 1099-INT shows an amount in Box 2 (Early withdrawal penalty)
Easy to overlook
The penalty is deducted even if it exceeds the interest earned If you opened a CD late in the year and broke it shortly after, the penalty can exceed the interest earned on the deposit. 1 You still report the full interest as income and deduct the full penalty here. The excess penalty effectively creates a loss that reduces your other income. Filers sometimes assume they can only deduct up to the interest amount, but that is not the case. General filing pattern — early withdrawal penalty overlooked on 1099-INT
This is an above-the-line deduction you do not need to itemize The early withdrawal penalty is an adjustment to income, not an itemized deduction. 2 You benefit from this deduction whether you take the standard deduction or itemize. Filers who take the standard deduction sometimes skip this line thinking it requires itemizing. It does not. IRS Form 1099-INT Instructions — Interest Income
Watch out for this
Confusing this with a penalty for early withdrawal from a retirement account (like an IRA or 401(k)). Line 18 is only for penalties on time deposits at banks and credit unions — savings instruments like CDs. Early distribution penalties on retirement accounts are reported on Form 5329 and calculated as part of your tax on Form 1040, not as an adjustment here.
Footnotes
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IRS Form 1099-INT Instructions, Box 2, Early Withdrawal Penalty. https://www.irs.gov/instructions/i1099int ↩
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IRS Publication 17, Your Federal Income Tax, Penalty on Early Withdrawal of Savings. https://www.irs.gov/pub/irs-pdf/p17.pdf ↩