Penalty on Early Withdrawal of Savings

If you paid a penalty for the early withdrawal of funds from a time savings account or certificate of deposit, you can deduct it, even if it exceeds the interest income you earned on the account during the year.

You must first report the gross amount of interest paid or credited to your account during the year without the penalty, on Line 1 of Schedule B. Then, you deduct the penalty amount on Line 30 of Form 1040 (you can't claim this deduction on Form 1040A or 1040-EZ).

You don't have to compute the amount of the deduction, because it will be shown in Box 2 of your Form 1099-INT.

Tip

Beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax� Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you.