tax question

[IronWing]

I had a CD that matured in 2006 (originated in 2005). I rolled the P&I into a new CD at the same bank. A month after re-newing the CD I had to cash it out early (poor planning on my part) and pay a three month interest penalty, which knocked the total value to less than the P&I of the orignal CD. Do I have to pay taxes on the total interest earned on original CD or can I subtract the penalty and only pay taxes on the interest I got to keep.

Keeping the math simple:
Original CD starting value $1000.
Original CD ending value $1050.
New CD starting value $1050.
New CD cash out value $1025.

Take home interest $25.00.

Do I pay taxes on the $50 or the $25?

 

[DaveSimmons]

With CDs you pay taxes on interest as you go every year, so you already (should have) paid interest for 2005 on the $50.

For 2006 they should report either $0 or negative -$25 interest, which might be deductible, I've never had it.

 

[IronWing]

I guess I wasn't clear. The interest on the first CD, $50, was paid in 2006 but then reinvested in the second CD, also in 2006. Then the penalty was paid in 2006.

 

[cubby1223]

I'd think you just follow whatever the tax statement the bank sends you says.

 

[Pepsi90919]

you should upgrade to SACD