This article helps you answer the question of whether or not car insurance is tax-deductible.
If you’re asking whether you can write off your car insurance from your tax, the short answer is Maybe.
Whether or not car insurance is tax-deductible depends on how you use your car.
So, in this article, you’ll learn a few things about car insurance and tax deductibles.
When is Car Insurance Tax-Deductible?
Car insurance is an expense to everyone, whether or not it is tax-deductible is a concern for many people.
If you use your car exclusively for business-related purposes, your car insurance and insurance deductible are tax-deductible.
In this case, car insurance is tax-deductible as part of other costs (expenses) associated with the car. Other tax-deductible business expenses include:
- Gas and oil
- Car repairs and maintenance
- Tires and milage
- Registration and licensing
- Toll and packing fees
Business-related purposes can include driving to a business conference, driving to visit clients, or using your car to deliver supplies or pick up other business items.
But, if you use your car strictly for personal use, you cannot deduct your car insurance premium on your tax return. Simply using your vehicle to commute to and from work does not qualify as a business purpose.
Who Qualifies For Car Insurance As Tax-Deductible?
Self-employed individuals qualify to write off car insurance premiums from their tax returns.
They almost always use their personal cars for business-related purposes.
But, they aren’t the only ones who qualify to deduct car insurance from their tax returns.
Other individuals for whom car expenses, including car insurance, are tax-deductible are:
- An employee who uses his/her car for business-related purposes but the employer doesn’t reimburse car expenses related to business use.
- Qualified performing artists who use their cars.
- Armed forces reservists, traveling up to 100 miles or more away from their homes.
- Fee-based local or state government officials.
So, if your business or employer already reimbursed you for the car expenses, you will not qualify to deduct them from your taxes.
What If You Use Your Car For Business And Personal Use?
Things become a little complicated if your car is both a business and a personal car.
In this case, you can deduct insurance but only partially. How?
You will deduct your insurance expenses from your taxes for the percentage of your car’s time under business use.
For example, if half the time you use your car, it is strictly for business, then you can deduct 50% of the yearly car insurance costs from your taxes.
Individuals who don’t use their cars for business but occasionally drive somewhere for their employers may also take advantage of this particular tax break.
There are special cases for certain individuals:
- Airbnb and renters
- Rideshare drivers
Airbnb Owners And Renters
If you rent a home or operate an Airbnb, any travel expense related to maintaining the home is tax-deductible. This includes your car insurance premium. Why?
You’re operating a business, and any car expenses which are business-related are tax-deductible.
So, if you drive to the rented home or Airbnb house for cleaning, upkeep, cleaning, or let in your guest, you can write off the car insurance for that trip.
But, if you only do this once in a while or don’t drive far, the deduction may be minimal and insignificant.
If you’ve signed up for a rideshare company such as Lyft, Uber, etc., you may need to have a special type of insurance policy that only becomes active when the car is in business.
In this case, that rideshare insurance policy you’ve purchased is a business expense. This means all its associated costs are tax-deductible. But this only happens when the car is in business use.
Besides, if your state and insurance provider allows you to use your personal car insurance while on a rideshare, you can deduct the entire premium for that time from your taxes.
You have to check with your insurer if they can allow this to occur.
Can You Deduct Mileage And Car Insurance?
Insurance demands that you choose one way to offset auto expenses. So, you can’t do both.
Generally, you can write off unreimbursed vehicle expenses using one of the following methods:
- Actual vehicle expenses – as listed above, this includes car insurance together with other listed expenses.
- Standard mileage – check with the tax department for the rates of standard mileage. If you choose to go with the standard mileage rate, you cannot as well deduct car insurance costs as a separate expense. But you’ll still be able to deduct tolls and parking fees.
If you aren’t sure which one to choose between the two, you can resort to reviewing the mileage deduction rules. Make sure you choose a deduction that gives you more money back.
How To Deduct Car Insurance Tax-Deductible
There are two ways you can use to deduct your car insurance on your tax forms:
- If you are a self-employed person, including when you run Airbnb or rideshare, you will file a Schedule C form. This form includes a section where you can consist of the insurance expenses that you want to deduct.
- If your business-related driving was for an employer, where you receive a W-2, you would fill out Form 2106. This form gives you the Employee Business Expenses section, assuming your company hasn’t already reimbursed your costs.
Remember: You’re only eligible for car insurance tax deductible if the total amount you can deduct exceeds the recommended standard deduction. Otherwise, trying to deduct your car expenses will waste time because you will not receive the payout.
If you’re unsure about how to proceed, consult with a qualified accountant to guide you through the process. You don’t want to make a mistake that can result in fines and penalties.
Keep Accurate Records For Filing Tax Deductibles
You want to do everything right and avoid any opportunity of a tax audit.
So, if you qualify to deduct car insurance costs from your annual tax bill, you need to keep accurate records.
For example, rideshare driving is highly flexible, and driving time varies. You may drive seven hours one day, 4 hours the next, and two another day.
In this case, your driving is sporadic, and knowing how much you drove throughout the year can be difficult. But if you’re keeping steady records, you won’t find any difficulty.
While noting every time you were driving for business, also accurately record the times you were off the clock or during personal issues.
Also, make sure you hold onto those driving records for at least three years. This is to help you justify any question, should the IRS ever ask you about your car insurance tax write-offs.
Car insurance can always be expensive. So, every bit of saving you can find is essential. Car insurance is tax-deductible, but only to an extent. You should know when the car insurance deductible is and how to write off the tax deductibles. If you’re unsure, consult with a professional accountant to avoid any mistakes while filing your tax returns.