Overdraft fees are never fun, but there’s a bright spot: In some circumstances, these charges can be tax deductible.
As you are probably well aware, both overdraft fees and taxes are an unavoidable part of life that can involve reducing your hard-earned cash. Which is why it can be really satisfying to use overdraft fees to save on taxes. This payback time, however, is typically not available for the average person who works a nine-to-five job.
So who can deduct these charges? Read on to learn:
• What are overdraft fees?
• Can I deduct overdraft fees on my taxes?
• What other bank fees can be deducted?
• What are tips for claiming bank-fee tax deductions?
What Are Overdraft Fees?
Before answering the question, “Are overdraft fees tax deductible?” it helps to understand how these charges work. An overdraft fee is assessed when someone authorizes a payment (such as when making a purchase with a debit card or by writing a check), but there isn’t enough money in their bank account to completely cover the cost of the transaction.
A bank may choose not to decline the payment and instead may charge the account holder an overdraft fee. If someone overdrafts multiple times in a day, they might be charged a fee for each overdraft. Or there may be a limit on how many times their bank or credit union might charge them a fee.
How Much Are Overdraft Fees?
Typically, each overdraft is assessed a charge of $35 or so. If you were to, say, make a bunch of payments like rent, utilities, and car payment on the first of the month and all of these triggered overdraft fees, you can imagine how quickly the amount can add up.
What Happens When You Overdraft Your Account?
Once someone realizes they overdrafted, they need to add more money to their bank account — at least enough to cover the amount they overdrafted and the cost of any overdraft fees they were charged. If someone doesn’t add enough money to their account, then the next time they make a deposit, the bank is likely to automatically withdraw that amount from their account.
What’s more, if the account holder doesn’t add more funds, then eventually the bank may choose to close their account. The debt would likely fall into the hands of a collections agency, which isn’t very fun for the consumer.
One way account holders can protect themselves from overdrafting is to set up an automatic transfer from a linked account (like a savings account) that steps in to save the day. There are pros and cons to overdraft protection. It may be offered for free; sometimes this service costs a fee, but even then, it’s usually less than an overdraft fee.
Who Can Deduct Overdraft Fees on Their Taxes?
Avoiding overdraft fees is a common goal, but despite your best efforts, these charges may still crop up and you may hope to write them off on your tax return. Whether or not you can do so depends on who is hoping to get a deduction. Sorry to say, but individuals who earn income from an employer can’t write off overdraft fees on their taxes. Only those who qualify in the following ways can write off their overdraft fees when tax season rolls around:
• Self-employed individuals
• Those who receive an IRS 1099-MISC form
• Anyone who operates an unincorporated limited liability company (LLC)
• People who practice a profession as a sole proprietorship
• Landlords who receive income from rental properties
And there’s a catch: These people can only write off overdraft fees that occur during the normal course of business operations. They may not write off their personal overdraft fees.
What Bank Fees Are Considered Business Expenses?
Aside from overdraft fees, other bank charges can be considered business expenses. Take note of the following:
• Account service charges
• ATM charges
• Incoming and outgoing wire fees
• Printing and depositing check fees
Other Bank Fees That Can Be Deducted
Overdraft fees aren’t the only charges that can potentially be deducted at tax time. As noted briefly earlier, business-related banking charges like credit card fees, ATM charges, and account service charges can be written off on taxes. However, you must own a business, be a sole proprietorship, or otherwise earn business income and incur these fees while running your business.
The cost of printing and depositing checks, incoming and outgoing wire fees, and other charges related to running a business are totally deductible on taxes as well.
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Bank Fee Write Off Example
Let’s look at an example of how a business owner may be able to write off bank fees. Imagine that Paul owns a bakery. He has a business bank account and uses a debit card to make last-minute purchases, plus a business credit card to make larger ongoing purchases. On Monday, he realizes he is out of flour. He places a bulk order for flour using his business credit card, but runs to the store to buy flour for the next few days using his debit card attached to his business bank account.
The problem is, Paul forgot to check his business bank account and is short on funds. As a result he overdrafts at the store. In all this rush, he forgot his credit card bill was due that very day and ended up paying it late, missing out on one of the benefits of automatic bill payments. What a Monday, and an expensive one at that!
What bank fees paid this month could Paul write off on his taxes?
• Bank account management fee
• Overdraft fee
• 1/12 of his credit card’s annual fee (assuming he saves up for it and pays it annually)
• Credit card late fee
All of these fees are a major headache and poor Paul has to pay them, but at least he can write them off on his taxes.
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Can You Deduct Bank Fees Even if You Do Not Own a Business?
You may be wondering, but what if I don’t own a business; can I deduct bank fees from taxes? It’s only possible to claim overdraft and other bank fees on your taxes if you own a business or work for yourself. Even then, they can only deduct business banking fees that occur during the course of business, not personal banking fees. So if you overdraft on your personal account, that can’t be taken as a deduction at tax time.
Tips for Claiming Bank Fee Tax Deductions
Let’s look at some ways to claim bank fees as tax deductions. Every penny counts, after all.
• It’s required that business owners file an IRS Schedule C (Form 1040) , Profit or Loss from Business form, in order to deduct business expenses.
• Any bank charges can be deducted as “other expenses.”
• If someone can claim deductions because they earn rental property income, they’ll file the Schedule E (Form 1040), Supplemental Income and Loss form.
• It’s only possible to declare bank charges that occurred in the year for the return being filed.
• If someone realizes they have unclaimed charges from past years, they need to amend their previous returns and refile them.
• The IRS wants to see bank accounts that relate to business expense deductions only being used for business purposes; no mixing in personal transactions.
Banking With SoFi
When tax time rolls around, only people who earn business income can potentially deduct overdraft fees related to their work. But even if you don’t have a business account, there are still ways to minimize the impact of overdraft and other banking fees.
See how SoFi can help you bank better in this way. When you open SoFi Checking and Savings with direct deposit, you’ll pay no account fees; if that direct deposit is $1,000 or more monthly, SoFi overdraft coverage will take care of up to $50 for you. What’s more, we pay a competitive APY so your money can grow faster. No fees, higher interest? Yes, please.
What bank charges are tax-deductible?
Those who earn business income can deduct bank fees from their taxes. These include overdraft fees, account service charges, and ATM fees that relate to their business.
How do I claim overdraft fees?
People who earn business income and accrue overdraft fees during the course of business can claim these charges by filing the IRS Schedule C (Form 1040), Profit or Loss from Business. If someone earns rental income as a landlord, they can file Schedule E (Form 1040), Supplemental Income and Loss.
Are there taxes on bank fees?
No, you don’t pay taxes on bank fees. Also, some people may be able to deduct bank charges from their taxes, provided they are business bank fees, not personal ones.
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