Updated September 30, 2026. Quick answer: Box 2 of Form 1099-INT reports interest or principal you forfeited for withdrawing a time deposit, such as a certificate of deposit, early. The payer does not subtract it from Box 1.
Schedule 1 (Form 1040) for 2025, read line by line: Schedule 1 lines 18 and 19.
Read box by box from the IRS form text: Form 1099-OID box 1 and Form 1099-OID box 2.
What the instruction says
The payer is told to “Enter interest or principal forfeited because of an early withdrawal of time deposits, such as an early withdrawal from a certificate of deposit (CD), that is deductible from gross income by the recipient.” The 1099-INT instructions read here are the January 2024 revision (combined with Form 1099-OID), which is the edition irs.gov shows as current for those forms. Those are instructions to the payer that files the form, so they show what a box is meant to hold, not what tax follows from it. Whether you can deduct the amount on your return is outside what these instructions decide.
Box 1 is not reduced
The same paragraph says “Do not reduce the amount reported in box 1 by the amount of the forfeiture.” So a form showing both boxes reports the full interest in Box 1 and the penalty separately in Box 2. Box 1 is covered on the Box 1 page.
Where the IRS points for the math
For working out the deductible amount, the instruction sends the payer to “Rev. Ruls. 75-20, 1975-1 C.B. 29, and 75-21, 1975-1 C.B. 367”. Those revenue rulings are not reproduced here.
Common mistakes
- Assuming Box 1 already has the penalty taken out. The instruction says it does not.
- Looking for a retirement account penalty here. An early distribution penalty on an IRA or 401(k) is a different subject from a CD forfeiture.
- Treating Box 2 as a fee charged on top of interest. It is interest or principal forfeited.
Related: 1099-INT Box 1 Interest Income: What Counts, 1099-INT Box 3: Savings Bond and Treasury Interest, and the CD ladder calculator.
Every box in one place: the 1099-DIV, 1099-INT and 1099-B boxes table. If your withdrawal came from an IRA or 401(k), see the Form 1099-R Box 7 codes.
Sources
- IRS, Instructions for Form 1099-DIV (Rev. January 2024): irs.gov/pub/irs-pdf/i1099div.pdf
- IRS, Instructions for Forms 1099-INT and 1099-OID (Rev. January 2024): irs.gov/pub/irs-pdf/i1099int.pdf
- IRS, Instructions for Form 1099-B (2026): irs.gov/instructions/i1099b
Source: the IRS instructions for the filer of each form, read at irs.gov on September 30, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.