Many consumers are feeling the pinch of rising bank fees, leading some to wonder if bank service charges and overdraft fees can be deducted on their tax returns. Unfortunately, the IRS doesn’t provide a bank charge tax deduction or credit for taxpayers who are classified as regular wage earners. However, if you are self-employed, have your own business or take part in rental property activity, you may be able to claim a deduction for overdraft fees and other bank charges on your IRS 1040 return.
If you have overdraft fees, you may be able to deduct them on your tax return. The primary factor regarding deduction eligibility is whether the fees in question occurred as part of personal use or business-related banking. If you are self-employed, file a 1099-MISC or work as part of an unincorporated LLC, you may be able to deduct these expenses. If these fees occurred due to personal activity, you cannot deduct them.
Who Can Deduct Bank Fees?
If all of your income comes from an employer, you are not eligible to deduct bank charges on your individual or married filing jointly tax return. Taxpayers who are self-employed, receive a 1099-MISC form or operate an unincorporated limited liability company (LLC) are eligible for deducting bank charges that occur in the course of business operations. Those who practice a profession as a sole proprietorship are also be eligible. Business-related bank charges that can be deducted include overdraft fees as well as account service charges, credit card fees and ATM charges. In addition to business owners, landlords who receive income from property rentals are also allowed to deduct bank charges that are incurred as part of rental operations.
How to Claim the Deduction
Eligible taxpayers who want to deduct bank charges as business expenses need to file IRS Schedule C (Form 1040), Profit or Loss from Business. Bank charges can be deducted as Other Expenses, a category that includes expenses incurred during business operation that are not covered by other categories on the form. If you are eligible to claim the deduction due to rental property income, file Schedule E (Form 1040), Supplemental Income and Loss. Include bank charges on the line for Other Expenses. You can only declare bank charges for the year in which you file your return. If you realize you have unclaimed charges from past tax years, you can amend your return for the years in question and refile your returns.
When to Consult a Tax Expert
The IRS expects bank accounts that are used in connection with business expense deductions to be used solely for business purposes. Business owners who mix personal and business funds in the same bank accounts should consult a tax expert before taking the deduction. Also, the IRS has the power to disallow charges that are not “ordinary and reasonable.” This could be the case with an excessive amount paid in overdraft fees, which typically indicates that a business is being poorly managed.