If you’re wondering whether your car insurance is tax-deductible, there is no straightforward answer. Your car insurance premium can be written off or deducted from your taxes, only under certain circumstances.
So, when is car insurance tax deductible? We take a look at this issue.
In this post, we’ve detailed some of the important information you need to know about writing off your car insurance premium when filing your tax returns.
When Is Car Insurance Tax Deductible?
To understand whether car insurance is tax-deductible, you must first understand whether car insurance is an allowable expense.
Generally, car insurance is classified as a ‘running cost’ of your vehicle, along with other car expenses such as petrol, tires, parking fees, repair, and servicing, etc. This allows you to claim car insurance as an allowable business expense.
This is also what makes car insurance tax deductible as part of the list of other car expenses.
In general, your car insurance is tax-deductible only if you use your car entirely for business purposes. This is where “car insurance is tax-deductible as part of other expenses” come in because it is among the many items that form part of the “actual car expenses.”
The other items that form part of your expenses are:
- Gas and oil
- Car repairs
- Garage rent
- Depreciation
- Tires
- Lease payments (subject to the lease inclusion amount)
- Licenses and registration fees
- Toll and parking fees
Who Is Eligible For Car Insurance Tax Deductible?
Typically, car insurance deductible is applicable to self-employed people who use their car for business purposes. This is called business-use auto insurance.
The business-related purposes that qualify for car insurance tax deductible can include:
- using your car to deliver or pick up business supplies,
- driving to a business conference, or
- driving to visit clients.
This means that you cannot deduct your car insurance costs during your tax return if you use your car strictly for personal use. But there are exemptions.
There are a few other specific individuals whose car insurance is tax-deductible. These people are:
- Armed forces reservists
- Qualified performing artists
- Fee-basis local or state Government officials
Note: Your car insurance is not deductible if your business or employer already reimburses you for the insurance and other costs. If you’re self-employed and the business reimburses the costs, you are also not eligible for care insurance tax-deductible.
What If You Use Your Car For Business And Personal Use?
In case you use your car for both business and personal use, you can partially write off your car insurance. How does this happen?
The law allows you to deduct your insurance costs from your taxes only for the percentage of your car’s time under business use. For example, if you use the car for business for half your time, you may deduct 50% of your annual car insurance costs on your taxes.
These deductions are for self-owned businesses, including:
- Airbnb Owners
- Renters
- Uber and Lyft drivers
If you don’t use your car for business but may occasionally need to drive somewhere for your employer, you can also take advantage of car insurance deductible. For example, if your employer asks you to attend a conference at a distance that requires you to drive to the location, your cost of insurance for that particular time is deductible.
However, this insurance cost will not be deductible if your employer reimburses it to you.
Before you claim car insurance tax or write it off, you may need to understand if your business or employer is already paying it back.
Can I Deduct Car Insurance And Mileage?
No, the law doesn’t allow you to deduct both car insurance and mileage. You’ll have to choose one of the two and which way you want to offset car expenses.
Generally, insurance statutes allow you to deduct unreimbursed car expenses using one of these methods:
- Actual car expenses: which include car insurance and the other car expense items (listed above).
- Standard mileage: as of 2020, the standard mileage deduction was $0.575 per mile.
Note: If you use the car standard mileage rate, you cannot deduct car insurance as a separate expense. But you can still deduct other expense items like tolls and parking fees.
If you’re unsure which one rate to use or which rate may let you deduct more, you may need to review the car mileage deduction rules. This will give you a hint on the one that’s appropriate for you.
Naturally, you should choose the option that saves you more money. So, while it would be great if there was a clear choice of the method to use, there isn’t.
How Much Car Insurance Is Tax Deductible?
If your car is for business, you won’t need to prorate your car insurance tax deduction. The deduction becomes straightforward.
However, people who use a personal car for business and personal purposes may need to prorate their deductions. In this case, you will need to figure out what applies to your taxes. For example, you’ll divide the car expenses between business and personal use based on the miles that you drive for each.
For instance, if 60% of your driven miles are for business use, leaving the other 30% for personal use, you’ll only apply 70% of your car expenses to your tax deduction. This applies to any other figures that represent your car use for different purposes.
After figuring out how to divide the expenses, you’ll need to report your expenses on one of these two tax forms:
If you’re self-employed, you must add the information to your Schedule C tax form. This form includes a section that allows you to include your insurance expenses that you want to deduct.
For the other scenarios, you’ll use tax Form 2106 – Employee Business Expenses – assuming your employer did not already reimburse you for the car expenses or costs.
Note: You’re only eligible for car insurance tax deduction if your total deductible amount exceeds the standard deduction.
Keep in mind that car insurance expenses rarely amount to more than a few thousands of dollars in a year. This may require you to make an application for several other deductions. For example, you can apply for deductions on other items such as other business expenses, certain education expenses, or mortgage interest to qualify for itemized deductions.
Consult With Your Accountant
It is important to do your taxes correctly the first time and all the time. Saving a few dollars to consult your time is worth more than the expense and time of a possible tax audit.
If you’re not sure about whether your car insurance is tax-deductible, consult with an accountant. You will get important information to help you make a decision.
You don’t want to undergo a tax audit or pay a tax fine because you didn’t do something well.
Final Thoughts
The only time your car insurance is a tax deduction is when you use your car solely for business. In any case, you’re not sure, you should consult with a tax professional before tax season. You also need to document your car expenses well to ensure you do not miss anything that is important to your tax deduction.