If a taxpayer withdraws his or her deposit on a CD before the instrument matures,the penalty for the early withdrawal on interest will be reported by the financial institution:

Question

Quizplus · Accepted Answer

The penalty for early withdrawal of interest on a CD is reported by the financial institution in Box 2 of Form 1099-INT. This box shows the amount of interest earned on the CD, including any penalty for early withdrawal. Therefore, the taxpayer can use this information to report the correct amount of interest income on their tax return. Options B and C are not correct because there is no such form or letter used for this purpose. Option D is not correct because the penalty amount needs to be reported to the taxpayer by the financial institution.

If a Taxpayer Withdraws His or Her Deposit on a CD