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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Can I deduct my 1% early withdrawal penalty on a Bond that

Customer Question

Can I deduct my 1% early withdrawal penalty on a Bond that I have at Chase Bank? This is not a CD, it's a Bond. I withdrew $111,000 from the bond a couple of months before December 2010. It is a one time penalty. In doing my taxes I see a place on the form for an early withdrawal deduction for "timed" savings", however neither the quarterly statements for the bond nor the 1099-DIV form  show  what the amount of the penalty was which leads me to believe that bonds are not viewed by the IRS as "timed" savings the way a CD is, thus perhaps prohibiting a deduction for this type of early withdrawal penalty.  Thank you for your advice!
Submitted: 3 years ago.
Category: Tax
Expert:  Lev replied 3 years ago.

LEV :

Hi and welcome to Just Answer!

LEV :

If you sold a bond - you should receive Form 1099-B or an equivalent statement from the broker.

Report the gross proceeds shown in box 2 of Form 1099-B as the gross sales price in column (d) of either line 1 or line 8 of Schedule D, whichever applies.

That amount should be already reduced by the amount of early withdrawal penalty.

However, if the broker advises you, in box 2 of Form 1099-B, that gross proceeds (gross sales price) were not reduced – add early withdrawal penalty to the basis in column (e) of either line 1 or line 8 of Schedule D, whichever applies.

Customer :

thank you for your advice. I just used the FreeTaxUSA software vendor online and it did not provide me with any options to do what you describe, i.e. Schedule D. It seemed to only let me deduct for an early withdrawal penalty on my CD or "timed" savings. I had entered the figures for the bond and clicked on the early withdrawal penalty option hoping to pull up a form that fit my situation but it only showed a way to deduct for a CD or savings account. Are you positive that the IRS recognizes early withdrawal penalties on Bonds the same as for a CD? In my mind, there should be no difference, because they both have penalties for early withdrawal regardless of the way they are set up. But something didn't work. I also had done a draft using H&R Block software and it also gave me the same problem.

Customer :

I feel I need to know more about this before accepting your advice on this matter. Thank you again.

LEV :

Bonds and CDs are different.

On the CD - your earning is the interest credited to your account.

Bonds are different - these are capital assets which you purchased - besides interest paid - you will have additional capital gain/loss when you sell bonds.

The sale transaction is reported to you on the form 1099-B and you will report the sale and calculate the capital gain/loss on the schedule D.

Most likely you did not indicate that you receive a form 1099-B - that is why the software did not include the schedule D.

Customer :

I don't think the software gave me the option of indicating a 1099-B....It asked for a 1099-DIV, and I filled in the amount of the taxable dividends reported on that.. I plugged in all figures which were pertinent to the bond(s) as per whatever the software prompted me to provide. I have gone ahead and filed my return, and because this issue is still unclear to me at this point, I am going to continue to investigate it and perhaps file an amended return later. If the software had prompted me for a 1099-B and given me a place on the form to fill in the penalty figures (which I was not able to easily locate on the 1099-B, my broker will need to advise), I would have done so, but the software did not provide me with that option. At this point, I am still very unclear as to whether absolutely it is true that the IRS considers capital loss to be the same as "early withdrawal penalty on timed savings". such as with CD interest.

LEV :

The issue is that CD and Bond are different. With CD - you putting your money into the account and earn interest income. When DC matures - you getting your money back. With Bond - you purchase the security which pays you dividends or interest (depending on type of the bond). When you sell Bond - you have a capital gain/loss = (selling price) - (purchase price).

LEV :

There is no form 1099-B when you take the money from CD. But there is a form 1099-B when you sell Bond.

Customer :

If there is a 1099-B form for selling a Bond (to show an early withdrawal penalty), then the software should have directed me to that form but it did not. It only gave me an option to put in figures for early penalty on a CD. Therefore, I do not know why the software didn't give me that option. So, for now, I am going to wait and see about this and do more research on this myself as I do not fully understand the issues involved. Thank you. . .

LEV :

No problem Take your time.

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