Dear Dr. Don,

My elderly mother has $20,000 in CDs that are in my name with my Social Security number. She now needs the money before the CDs mature. How can I get out of a penalty? If I withdraw the money, is the full amount treated as income for me?

— Janice Juncture

Dear Janice,

It’s fairly common for an adult child to be added as a signatory to an elderly parent’s bank accounts as a matter of convenience. In fact, it’s called a convenience account. A convenience account allows the account holder to name convenience signers on the account, but the account remains the account holder’s and is not jointly owned by the convenience signers.

When the account is just in your name, then you’ll have to do some work to have the interest income reported as your mother’s income, with you as nominee. Here’s how the Internal Revenue Service publication “Topic 403 — Interest Received” presents it:

A nominee is someone who receives, in his or her name, income and the reporting return that actually belongs to another individual. If you received interest as a nominee for the actual owner, you need to show that amount below a subtotal of all interest income listed on Form 1040 Schedule B or Form 1040A Schedule 1. Follow the form instructions for nominees. You must prepare a Form 1099-INT for the interest that is not yours and give Copy B to the actual owner. You must also file a copy and a completed Form 1096, “Annual Summary and Transmittal of U.S. Information Returns,” with the Internal Revenue Service Center. Generally, if you receive a Form 1099 for amounts that actually belong to another person, you are considered a nominee recipient. It may be necessary for you to file with the IRS and furnish to the other owners a Form 1099. For more information on this requirement, refer to the Instructions for Form 1099-INT and Form 1099-OID.

In your shoes, I’d work with a tax professional to make sure that this gets done correctly. To add a little more complexity to the mix, any early withdrawal penalty is a tax-deductible expense, but it isn’t netted out against the taxable income. IRS Publication 550, Investment Income and Expenses, explains the deduction in greater depth:

Penalty on early withdrawal of savings.

If you withdraw funds from a certificate of deposit or other deferred interest account before maturity, you may be charged a penalty. The Form 1099-INT or similar statement given to you by the financial institution will show the total amount of interest in box 1 and will show the penalty separately in box 2. You must include in income all interest shown in box 1. You can deduct the penalty on Form 1040, line 30. Deduct the entire penalty even if it is more than your interest income.

It’s the bank’s decision whether they will enforce the penalty when you withdraw the funds. Talk to the branch manager and explain the situation. The worst that can happen is that he or she says no.

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