Many savings accounts and investments, including certificates of deposits, penalize investors for prematurely withdrawing their funds. Often times, the bank or issuing entity will automatically withhold a portion of the investor’s proceeds before distributing the remaining funds as cash. The good news, though, is such penalties can be deducted using Line 30 of Form 1040.
To deduct early-withdrawal penalties, the taxpayer should gather each Form 1099-INT or Form 1099-OID associated with any early-withdrawal penalty. Box 2 of Form 1099-INT (or Box 3 of Form 1099-OID) will list the penalty amount charged to the taxpayer. Once all such penalties for the year are totaled, the taxpayer should transfer that dollar figure to Line 30 of Form 1040 and attach each associated Form 1099.
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