1099-INT box guide
1099-INT Box 2: Early withdrawal penalty
Trace an early withdrawal penalty from Form 1099-INT to the eligible Schedule 1 adjustment.
Return destination
Where the amount goes
Schedule 1 early withdrawal penalty adjustment
1099-INT
Return to the complete form guide and reconciliation worksheet.
Checks before filing
- Match the penalty to the account withdrawal records.
- Do not subtract Box 2 directly from Box 1 on Schedule B.
- Confirm the current Form 1040 instructions allow the adjustment for your facts.
How Box 2 works
Box 2 shows interest or principal forfeited because you withdrew funds from a time deposit — a CD or similar time savings instrument — before its maturity date. The instructions treat this explicitly as a penalty, not negative interest: the payer still reports the full gross interest in Box 1 (or the applicable box) on its own line, and Box 2 sits separately so the two figures don't offset each other on the form itself.
Because the penalty is a deduction claimed elsewhere on the return rather than a subtraction on Schedule B, it has to be pulled off the 1099-INT and carried to a different part of the return from the interest-income entry — two line items from one form, feeding two different places. When a CD is closed early through the same institution that reports the year's regular interest, confirm the Box 2 figure against that institution's own closing statement or transaction confirmation, since some institutions net the penalty into the funds disbursed rather than displaying it as a separate line on the account statement.
A common misreading is subtracting Box 2 directly from Box 1 before reporting interest income on Schedule B — the instructions describe deducting the penalty separately to figure adjusted gross income, not netting it against interest. The recipient instructions also point to the current Form 1040 instructions to confirm eligibility, so a Box 2 figure being reported doesn't itself guarantee the deduction applies to every taxpayer's facts. Because the box description covers principal as well as interest forfeited, on a very short-held instrument the penalty can occasionally be close to, or even exceed, the interest earned on the same account.
Worked example
A taxpayer's Form 1099-INT shows Box 1 of $150 in interest income and Box 2 of $25 in early withdrawal penalty from closing a CD four months before maturity. The taxpayer reports the full $150 as interest income with no reduction, then separately claims the $25 as an adjustment to income, which lowers adjusted gross income even though it is never subtracted from the interest figure itself.
Related 1099-INT boxes
Box 1: Interest income
Understand taxable bank and investment interest and where it enters the federal return.
Box 3: U.S. savings bond and Treasury interest
Separate federally taxable Treasury interest that may receive different state income-tax treatment.
Box 4: Federal income tax withheld
Reconcile backup withholding from interest with the federal withholding claimed on Form 1040.
Box 8: Tax-exempt interest
Report federally tax-exempt interest without including it in ordinary federal taxable interest.
Frequently asked questions
What does Box 2 mean on 1099-INT?
Box 2 reports a penalty charged because funds were withdrawn before maturity. It is not negative interest; when eligible, it is claimed separately as an adjustment to income.
Do I subtract the Box 2 penalty from my Box 1 interest before reporting it?
No. Report the full Box 1 interest amount on Schedule B; the Box 2 penalty is claimed separately as its own adjustment to income, not netted against the interest.
Where on my return does the Box 2 penalty actually go?
It's claimed as an adjustment to income under the current Form 1040 instructions for the early-withdrawal-penalty deduction — check those instructions for the specific line, since it isn't entered directly on Schedule B.
My CD renewed automatically and I never touched the money — why is there a Box 2 amount?
A penalty in Box 2 means the payer's records show funds were withdrawn from a time deposit before maturity at some point during the year — worth checking your account activity or contacting the payer if you don't recall an early withdrawal, since the amount should tie to an actual transaction.