Is car insurance tax deductible?
If you're looking for ways to reduce your taxable income and maximize your refund, you may wonder, is car insurance tax deductible? In some cases, it is. If you use your vehicle for business purposes, or if you meet other specific requirements, car insurance is tax-deductible. However, before you make this write-off, it is crucial that you familiarize yourself with filing forms and requirements.
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UPDATED: Mar 22, 2022
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- In many cases, car insurance is tax deductible
- Using your vehicle for business purposes may allow you to deduct all or a portion of your insurance costs
- If you plan to write off your insurance costs, it is important that you keep accurate records of vehicle-related expenses
Tax deductions and tax write-offs are one and the same. Both terms refer to expenses you can subtract from your income for the purposes of reducing the amount of income subject to taxes. By lowering your taxable income, you also reduce the amount you owe and, in the process, maximize your tax return.
The Internal Revenue Service website provides an expansive list of credits and deductions available to individuals. You can also use the following guide to answer your question, “Is car insurance tax-deductible?”
When are car insurance premiums tax-deductible?
The most surefire way car insurance is tax deductible is if you use a vehicle solely for business purposes. If you drive your car, truck, van, or what-have-you solely for business reasons, you can deduct all expenses associated with the vehicle and your travel. This includes not only your monthly insurance premiums but also, gas, the costs of maintenance, vehicle registration fees, and even depreciation values.
Of course, there are a few caveats to this rule. If you ask, “Can you write off car insurance as a business expense?” and the alleged business activity is your daily commute, the answer is no. A commute is not a business activity, and you cannot write off any expenses related to it.
You also cannot write off any vehicle-related expenses for which your employer reimburses you. If your employer pays for half of your car insurance because you run business-related errands with your vehicle, you cannot claim car insurance as a write-off.
How can you deduct car insurance on taxes?
When you conduct business travel with a vehicle, you may question, “How can you write off car insurance for business travel?” You can choose one of two ways to do this.
The first and simplest method of deducting auto insurance costs from your taxes is by using the Actual Expenses method, which involves writing off all business-related vehicle expenses. This includes the total amount you pay annually in insurance costs and premiums.
The second process is the Standard Mileage method. With this technique, you calculate the deduction by keeping track of the miles you drove for business purposes and multiplying this number by the current mileage rate.
You can shift from one method to the other each year without any penalty, based on which one yields the highest amount. However, you cannot use both in any given year.
If you are self-employed, you claim deductions on your Schedule C: Profit or Loss From Business form. If you work for someone else but have business-related vehicle expenses, you should use Form 2106 Employee Business Expenses.
How can you claim car insurance on taxes if your car is for personal and business use?
What if, though, you drive your vehicle for both business and personal reasons? How can you claim car insurance costs in this case?
Though a bit trickier, you can still claim a tax rebate car insurance if your vehicle serves multiple purposes. To do so, calculate the amount of time you drive your vehicle for business purposes versus personal reasons. If you use your car for business purposes at least half the time, you can write off 50% of your annual insurance costs on your taxes. If you use your vehicle just 25% of the time for non-personal reasons, you can write off 25% of your yearly insurance costs.
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When can you write off car insurance deductibles?
As of 2018, you can no longer subtract personal losses that arise as a result of theft or casualties, regardless of whether your insurance policy covers said losses. However, the one exception to this new rule is if your losses occur as the direct result of a disaster within one of the few federally-mandated disaster areas.
Disaster areas can change from year-to-year. As an example, many parts of California were declared disaster areas for much of 2017 due to the rampant wildfires. That same year, Hurricane Harvey, Hurricane Maria, and Hurricane Irma were the only other declared disasters.
If you experience financial vehicle-related loss because of a declared disaster, you may be able to write off the deductible on your taxes for that year. However, if your insurance compensates you for the loss, you lose your right to write off the cost. You can only deduct from your taxes the amount of money you actually lost. This means, in most cases, that you can only write off damage-related losses your insurance does not cover through your comprehensive policies, such as flood insurance or a similar product.
Moreover, to write off a deductible, you must subtract $500 from the total amount. If your deductible is only $500, you cannot deduct any amount from your taxes. If your deductible is $1,000, you can write off $500.
How should you keep detailed records for your tax filing?
If you hope to write off your car insurance premiums — whether in full or in part — you must keep accurate records of your expenses and a detailed log of the miles you drove for business reasons. Otherwise, the IRS may deny your deductions or, in the worst-case scenario, conduct a complete tax audit. Examples of ways to document the miles you drove and expenses you accrued for business include several procedures:
- Use a mileage tracking app to track every mile you drive for business reasons.
- Keep receipts for all business-related vehicle expenses, including gas, oil changes, repairs, tire rotations, and, of course, insurance premiums. Attach these to your tax return.
- Keep your records for at least three years since the IRS may request proof from years prior if it suddenly suspects you of writing off exorbitant expenses.
It is important to use the right forms when writing off expenses since an error in reporting may trigger an audit.
In Select Cases, Car Insurance Is Tax-Deductible
In response to your question, “Is auto insurance tax deductible?” the answer is yes, but only in select cases. If you use a vehicle for business-related purposes, or if you experience financial loss because of vehicle-related damages that occur within a federally-mandated disaster area and as a result of a disaster, you can write off all or part of your annual insurance costs and/or your deductible. Just be sure to keep proper documentation if you plan to do so.