Are Bank Fees Tax-Deductible?
If you are an independent contractor. self-employed, or receive a 1099, and overdraft fee caused by a work purchase can be written off on your taxes.
According to the IRS, to be deductible, the expense must be both ordinary and necessary. The starting point in determining whether you can deduct an expense is to ask yourself this:
Is this expense both ordinary and necessary to my line of work?
- An expense is ordinary if it is common and accepted in your industry.
- An expense is necessary if it is helpful and appropriate for your business.
In this case, the overdraft fee would satisfy both of these requirements as long as it resulted from a purchase that is in connection with your line of work.
The low-down on deducting bank fees
You are an independent dog walker for Wag, and you did not have quite enough money in your bank account to cover that last purchase of doggie treats. Let's say your bank is Capitol One and they hit you with the dreaded overdraft fee. Can you deduct this? Yes, you can deduct that!
You drive for Uber and you had your car detailed but forgot to check your account before you swiped your card to make that purchase. You now have a $35 overdraft fee. Is this deductible as an Uber expense? Absolutely! Again, the key is making sure the purchase in connection with the overdraft fee is something you legitimately bought for your line of work.
The key is that the purchase made was legitimately for your dog walking work and was not a personal purchase that caused the overdraft.
Keep in mind though, that these types of expenses should not be a regular occurrence in your work practice. Excessive use of this write off can run the risk of being deemed as ineligible by the IRS.
What other bank fees can you deduct?
Many self-employed individuals and independent contractors pay too much in taxes because of expenses that they could have taken but were overlooked. Overdraft fees are one of the commonly overlooked write offs.
In addition to overdraft fees, there are other bank fees you may be able to include as a deduction. These include:
- insufficient funds fees
- monthly maintenance fees
(Note: the two above mentioned fees will only qualify if they are from a business bank account)
How can I write off these fees?
So now that you know you CAN deduct your overdraft fees (and other above mentioned fees), you’re probably wondering where to list these on your return. These fees can be listed under the category “other miscellaneous expenses”. Depending on the software you use or other online platform like TurboTax or H&R Block, you will then be able to name them explicitly as “overdraft fee” or “maintenance fee”, etc.
If you use Keeper, we’ll automatically monitor your purchases for overdraft fees caused by a work-related purchases.
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At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email email@example.com if you have questions.