Over the course of a year, American consumers can rack up plenty of bank fees. A brief moment of forgetfulness can lead to account fees, late fees or penalty fees. Anyone who has been hit with one of these fees may have considered deducting them on their tax returns, which leads us to ask: which bank fees, if any, are tax deductible?
“Unfortunately, most bank fees cannot be deducted on consumer tax returns,” said Lisa Ehrlich, a certified public accountant and accounting professor at Touro College.
There are two instances where individual taxpayers can deduct a bank fee.
When you withdraw funds from a certificate of deposit (CD) before it reaches maturity, the bank may impose an early withdrawal penalty, which is usually equivalent to several months worth of interest earnings. This penalty can be deducted.
The IRS will also allow you to deduct the rental costs of a safe deposit box “if you use the box to store taxable income-producing stocks, bonds or investment-related papers and documents.” If the safe deposit box is used only to store jewelry, personal items or tax-exempt securities, the rental fees cannot be deducted.
Common banking fees such as monthly service fees, overdraft fees, check-writing fees and ATM fees are not tax-deductible on personal bank accounts.
Better luck for business, self-employed
Businesses and self-employed individuals get better treatment when it comes to tax deductions.
“For businesses and the self-employed, most bank fees are considered operating expenses,” Ehrlich added. However, business owners and the self-employed must be sure to separate business bank accounts and personal bank accounts in addition to using the appropriate accounts for the appropriate transactions (business vs. personal). Otherwise, the IRS may not permit certain deductions if they are not deemed “ordinary and necessary.”
In the case Bailey v. Commissioner, T.C. Memo. 1991-385, a small-business owner with more than $30,000 in overdraft charges could not prove that the overdraft fees were “ordinary and necessary,” and was not allowed to deduct them.
Whether you are a regular taxpayer, self-employed or a business owner, good recordkeeping makes the tax-filing process much easier. As always, consult a tax professional or financial advisor with specific questions regarding your tax situation.