On Form 1040, the 10% additional tax on an early retirement distribution and the deductible penalty on an early savings withdrawal go to two different places. The retirement penalty is calculated on Form 5329, carried to Schedule 2, and reported on Line 23 of Form 1040 in the other taxes section. A bank early withdrawal penalty, such as one charged for cashing in a CD before maturity, is a deduction on Schedule 1, Line 18, and reduces the adjustments total shown on Form 1040, Line 10.
The 10% Retirement Penalty Goes to Line 23
If you took money from an IRA, 401(k), or similar plan before age 59 1/2, the extra 10% tax is treated as an other tax rather than a deduction.1Internal Revenue Service. Substantially Equal Periodic Payments – Section: 1. Is there an additional tax on early distributions from certain retirement plans? You calculate it on Form 5329, which lets you apply any exceptions before arriving at the final amount.2Internal Revenue Service. IRS Instructions for Form 5329 – Section: Purpose of Form That final figure flows to Schedule 2 and then onto Line 23 of Form 1040.3Internal Revenue Service. IRS Line-by-Line Instructions for Free File Fillable Forms – Section: Line 23
Your Form 1099-R signals whether this applies. Code 1 in Box 7 generally indicates an early distribution subject to the additional tax.4Internal Revenue Service. IRS Instructions for Form 5329 – Section: Who Must File The 10% is figured only on the taxable portion of the withdrawal, not on any return of nondeductible contributions.5Internal Revenue Service. IRS Publication 17 – Section: Total Support
The CD or Savings Penalty Goes to Schedule 1, Line 18
An early withdrawal penalty charged by a bank on a time deposit is a different creature. It reduces your adjusted gross income rather than adding to your tax. You will find the amount in Box 2 of Form 1099-INT or Box 3 of Form 1099-OID.6Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID – Section: Box 2. Early Withdrawal Penalty7Internal Revenue Service. IRS Publication 550 – Section: Penalty on early withdrawal of savings8Internal Revenue Service. IRS Line-by-Line Instructions for Free File Fillable Forms – Section: Line 10
Where the Distribution Itself Is Reported
The penalty lines are separate from the lines where the withdrawal shows up as income. For an IRA distribution, the gross and taxable amounts go on lines 4a and 4b of Form 1040. For pensions, annuities, and most other retirement plans, use lines 5a and 5b.9Internal Revenue Service. IRS Form 1040 Instructions – Section: Lines 4a and 4b Box 1 of Form 1099-R gives the total distribution and Box 2a shows the taxable portion the administrator determined.10Internal Revenue Service. IRS Instructions for Form 5329 – Section: Part I—Additional Tax on Early Distributions
Exceptions That Can Reduce the Amount on Line 23
Before anything reaches Line 23, Form 5329 lets you subtract distributions that qualify for an exception. Common ones include death of the account owner, total and permanent disability, unreimbursed medical expenses above 7.5% of adjusted gross income, qualified higher education expenses from an IRA, a first-time home purchase from an IRA up to a $10,000 lifetime limit, and distributions to military reservists called to active duty for at least 180 days. You enter the exempt amount along with a two-digit code, such as 03 for disability or 08 for education.11Internal Revenue Service. IRS Instructions for Form 5329 – Section: Line 2 If the entire distribution qualifies, nothing carries to Schedule 2 or to Line 23 for that year.