Intuit Academy Tax Practice Exam

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Study for the Intuit Academy Tax Exam. Prepare with interactive quizzes, flashcards, and detailed explanations for each question. Enhance your tax knowledge and ace your exam confidently.

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Is a penalty for early withdrawal of a certificate of deposit (CD) an allowable tax deduction?

Yes, always deductibles
No, it is not deductible
Yes, but only partially
No, only if penalties exceed $500

The correct answer is: No, it is not deductible

The penalty for early withdrawal of a certificate of deposit (CD) is not an allowable tax deduction. When an individual withdraws funds from a CD before its maturity date, they typically incur a penalty fee imposed by the financial institution. However, this penalty is considered a personal loss related to savings and does not qualify as a deductible expense under the current tax laws. In general, the IRS does not allow taxpayers to deduct personal fines, penalties, or losses incurred as a result of bad investments or financial activities, including penalties for early withdrawal of savings instruments like CDs. This aligns with the tax principle that only certain types of expenses related to the generation of taxable income are considered deductible. Thus, while it's indeed a financial setback for the individual, it does not meet the criteria required for a tax deduction.