Intuit Academy Tax Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

The penalty for early withdrawal of a certificate of deposit (CD) is not considered a deductible expense for tax purposes. When an individual withdraws funds from a CD before its maturity date, the bank typically charges a penalty fee. This penalty is a consequence of breaking the terms of the agreement and is viewed by the IRS as a personal expense rather than a business expense or an investment loss.

Tax law generally allows for certain categories of deductions, but personal penalties, such as those incurred from early withdrawals, do not fall under these categories. Consequently, taxpayers cannot write off this penalty amount on their tax returns, regardless of whether it is a small or large fee.

Understanding that these types of penalties are treated differently than, for instance, investment losses or other financial penalties that may be eligible for deduction can help clarify why this is the correct answer. The nature of the expense is pivotal; since it results from a personal financial decision rather than a cost incurred as part of a business activity, it does not qualify for deduction.