Forfeited Interest

A

Artbuc

Member
Jurisdiction
Pennsylvania
I reported interest from a CD in 2021. That was accrued interest which was not distributed to me. In 2022 I cashed the CD before maturity and forfeited the 2021 accrued interest. I asked my bank for a corrected 2021 1099-int but they said they will only give me a 2022 1099- int. Not sure if this will show what happened in 2021 or if it will satisfy IRS.

Then I did some research and it looks like I have to report forfeited interest as an adjustment to income. I can see how that would work in current year but how could I use that to amend my 2021 return. Can someone give me some guidance? Thank you.
 
Artbuc said:
I reported interest from a CD in 2021. That was accrued interest which was not distributed to me. In 2022 I cashed the CD before maturity and forfeited the 2021 accrued interest. I asked my bank for a corrected 2021 1099-int but they said they will only give me a 2022 1099- int. Not sure if this will show what happened in 2021 or if it will satisfy IRS.

Then I did some research and it looks like I have to report forfeited interest as an adjustment to income. I can see how that would work in current year but how could I use that to amend my 2021 return. Can someone give me some guidance? Thank you.
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Why did you report accrued but not distributed interest on your 2021 return in the first place? Generally you only report interest that is actually realized, i.e. actually received/paid out to you, during the tax year.
 
Tax Counsel said:
Why did you report accrued but not distributed interest on your 2021 return in the first place? Generally you only report interest that is actually realized, i.e. actually received/paid out to you, during the tax year.
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I always have 6-8 CD's. The interest is never distributed until the CD matures. It stays with the CD and collects compound interest. However, I still have to pay pax. The banks send 1099-int. Maybe it is just semantics. The interest is technically realized…I just elect to let the bank keep it and compound the interest.

Can you help me with my question?
 
It sounds like you are rolling the interest back into the CD.
 
Artbuc said:
I always have 6-8 CD's. The interest is never distributed until the CD matures. It stays with the CD and collects compound interest. However, I still have to pay pax. The banks send 1099-int. Maybe it is just semantics. The interest is technically realized…I just elect to let the bank keep it and compound the interest.

Can you help me with my question?
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Ok, so the interest is realized and instead of taking it out of the bank you just kept it in the account hoping to get more interest on it by compounding, right? In that case you deal with forfeited interest on your 2022 return. You do not amend your 2021 return for this. So, in short, the answer to your question about how you can use it to amend your 2021 return is that you can't amend the 2021 return for this. You take a deduction for the previously taxed but now forfeited interest on the 2022 return.
 
Tax Counsel said:
Ok, so the interest is realized and instead of taking it out of the bank you just kept it in the account hoping to get more interest on it by compounding, right? In that case you deal with forfeited interest on your 2022 return. You do not amend your 2021 return for this. So, in short, the answer to your question about how you can use it to amend your 2021 return is that you can't amend the 2021 return for this. You take a deduction for the previously taxed but now forfeited interest on the 2022 return.
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Thank-you. That is what I gathered for the IRS. For Pa I think I am out of luck.
 
Interest is earnings/income, not gain or loss from sale.

Not capital gain or capital loss.

If you own a bond that pays interest, the interest is not a capital gain or capital loss. If you sell the bond for more or less than you paid for it, then you have a capital gain or loss.

That lines 2 and 5 on the tax form differentiate between interest and gains/losses should confirm that for you.

I think you treat your interest loss as an adjustment to the interest you earn in 2022, not a capital loss.

Tax Counsel may come back and weigh in on this.

I suggest you study up on the PA tax booklet. There should be plenty of information on both.

2021 Pennsylvania Personal Income Tax Return Instructions (PA-40 IN)
 
adjusterjack said:
Interest is earnings/income, not gain or loss from sale.

Not capital gain or capital loss.

If you own a bond that pays interest, the interest is not a capital gain or capital loss. If you sell the bond for more or less than you paid for it, then you have a capital gain or loss.

That lines 2 and 5 on the tax form differentiate between interest and gains/losses should confirm that for you.

I think you treat your interest loss as an adjustment to the interest you earn in 2022, not a capital loss.

Tax Counsel may come back and weigh in on this.

I suggest you study up on the PA tax booklet. There should be plenty of information on both.

2021 Pennsylvania Personal Income Tax Return Instructions (PA-40 IN)
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i did study including FAQ's on Pa Dept of Rev website. Pa considers cashing CD a disposition of capital asset. Interest lost due to early withdrawal csn offset interest on that CD in the year of disposition. If early withdrawal penalties exceed interest, you can deduct that excess as a capital loss but only in the year of disposition. In my case, that excess would be the interest accrued in prior year. This will not help me because I have no other capital gain to offset. If you have a net capital loss, Pa says you must eat it.
 
Looks like you are partly right but confusing the issue by referring to capital asset and capital loss.

See Page 15 of the instruction booklet:

"Forfeited Interest Penalty You may offset the penalty for premature redemption or withdrawal of a time savings account or certificate of deposit, only against the interest income you received in the same taxable year from that account or certificate. You cannot offset this penalty against other interest income. If your total penalty exceeds the related interest income, you may report the excess as a loss on PA Schedule D"

That suggests to me that you file an amended return for 2021 regardless of what year the 1099 is issued for.

You should have enough contemporaneous documentation of the penalty when you incurred it (which you should keep in a permanent file) if you are ever questioned by the taxing agency. Ditto for not addressing it in 2022.

I suggest you consult a tax pro so you don't make a costly mistake.
 
adjusterjack said:
Looks like you are partly right but confusing the issue by referring to capital asset and capital loss.

See Page 15 of the instruction booklet:

"Forfeited Interest Penalty You may offset the penalty for premature redemption or withdrawal of a time savings account or certificate of deposit, only against the interest income you received in the same taxable year from that account or certificate. You cannot offset this penalty against other interest income. If your total penalty exceeds the related interest income, you may report the excess as a loss on PA Schedule D"

That suggests to me that you file an amended return for 2021 regardless of what year the 1099 is issued for.

You should have enough contemporaneous documentation of the penalty when you incurred it (which you should keep in a permanent file) if you are ever questioned by the taxing agency. Ditto for not addressing it in 2022.

I suggest you consult a tax pro so you don't make a costly mistake.
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Thanks, I was only using the same language that Pa does, or at least did when answering a question on their website. I agree about amending my 2021 Pa return. Pa is often very different than the Feds.

Thanks very much for your help.
 
You have to be careful when reading "guides." The can often be misleading because it's somebody's interpretation of somebody's interpretation.

Short of reading tax statutes, the tax instructions are often the best source.
 
adjusterjack said:
Looks like you are partly right but confusing the issue by referring to capital asset and capital loss.

See Page 15 of the instruction booklet:

"Forfeited Interest Penalty You may offset the penalty for premature redemption or withdrawal of a time savings account or certificate of deposit, only against the interest income you received in the same taxable year from that account or certificate. You cannot offset this penalty against other interest income. If your total penalty exceeds the related interest income, you may report the excess as a loss on PA Schedule D"

That suggests to me that you file an amended return for 2021 regardless of what year the 1099 is issued for.

You should have enough contemporaneous documentation of the penalty when you incurred it (which you should keep in a permanent file) if you are ever questioned by the taxing agency. Ditto for not addressing it in 2022.

I suggest you consult a tax pro so you don't make a costly mistake.
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You were right. I was able to file an amended PA return. Turns out it was only $3 and PA considers that an even return. LOL, I bet if I owed them $3 they would be all over me.
 

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