Is Car Insurance Tax Deductible?
It’s no secret that car insurance rates have been and continue to increase. If you could get some money back on your tax returns, that would be a great help.
Tax season is a really important opportunity to claim any expenses that you have had throughout the year to help ensure that you get the maximum tax refund.
As you go through your tax forms, you may be wondering whether you can deduct car insurance from your tax return.
The short answer is yes, car insurance premiums can be claimed back; however, this is only possible in very specific circumstances.
If you use your vehicle for business purposes or you’re self employed, your car insurance premiums and your insurance deductible will be regarded as business expenses and you will be able to claim.
If you use your car for personal reasons only, your car insurance will likely not be tax deductible.
In this article, we will uncover how and when you can claim back tax on your car insurance premiums and deductible to help you get the most out of your tax refunds.
Your Car Insurance Premium and Deductible Defined
Car insurance premium
A car insurance premium is the contribution that you pay to have insurance cover in place from an insurance company.
You will typically pay this contribution either every month, or every six months.
In some cases, paying your insurance premiums for a full year up front will earn you a substantial discount on the premium you pay.
Your car insurance deductible
A car insurance deductible is an amount of money that you need to pay out of pocket on an insurance claim before your insurance company will cover the rest.
For example, let’s say you have a deductible amount of $500 that you have agreed upon with your insurer. If you have an accident and damages come to $5,000, you would need to pay $500, and your insurance company would settle the remaining $4,500.
Typically, a car insurance deductible can be selected based on the amount that you can afford. The most common car insurance deductible is $500.
What Is a Tax Deduction?
A tax deduction is a sum of money that you could subtract from your annual taxable income when you file your tax return.
Not all your expenses will qualify for a tax deduction. When it comes to your car insurance and car maintenance, it is important to know what you can and cannot claim for.
There is a wide variety of vehicle expenses that can be claimed as tax deductions. In the case of car insurance, claiming even a part of your auto insurance premium as a deduction can be challenging.
When Is Your Auto Insurance Tax Deductible?
If you use your car for business-related purposes, there are many expenses related to your car that you can claim for. These tax-deductible expenses will include your auto insurance premium.
Employed individuals
If you are employed, you could fall into one of the following categories and your car insurance premiums may qualify for a tax write-off:
- Delivery persons.
- Roadside mechanics.
- Photographers.
- Videographers.
- CEOs.
- Business managers.
- Salespeople.
- Media personnel.
- Rideshare drivers.
You won’t be able to claim for your trip to and from the office, but you will be able to claim for travel expenses related to client visits, deliveries, and so forth.
Self-employed individuals
As a self-employed person, you can also deduct expenses from your tax if they relate to the use of your vehicle for business purposes. In fact, self-employed individuals make up the majority of people who can deduct their car insurance premiums from their tax contributions.
Other qualifying individuals
There are other individuals who may also qualify to deduct their car insurance premium from tax. These include:
- Armed forces reservists who travel up to 100 miles from home.
- Qualified performing artists.
- Fee-based state or local government officials.
If you qualify to deduct your business-related vehicle expenses from your tax return, you can choose between two methods of doing so:
Actual expenses
If you use the actual expenses method, then you can typically deduct the following from your taxes, along with your auto insurance premiums:
- Fuel and oil.
- Car repairs.
- Depreciation of the vehicle.
- Tires.
- Garage rent.
- Lease payments.
- Registration fees and licensing.
- Tolls and parking fees.
On the other hand, the following items do not count as business expenses to use toward a tax deduction:
- The personal use of a vehicle.
- Commuting mileage to and from the office.
- Parking fees if you pay to park your car at the office.
- Advertising on your car.
Standard mileage method
If you use the standard mileage method, you will need to multiply your business miles by the standard mileage rate that the IRS sets for the year in question.
This rate covers driving costs, gas, repairs, maintenance, and depreciation. With this method, you cannot deduct these costs separately.
You can select either of these methods and change them from year to year if you wish.
How Much of Your Car Insurance Premium Can You Deduct on Your Taxes?
If you are going to use the actual expenses method, you will have to calculate the percentage of the miles you use your car for business. This lets the IRS know how much of your mileage is used for business versus private or personal use.
To do this, you need to simply divide the number of business miles by your annual mileage and multiply this total by 100.
For example:
If you drove 15,000 miles last year and 8,000 of those miles were for business use, that means you used your car for business 53% of the time.
As a result, when it comes to car insurance, you can deduct 53% of your auto insurance premium from your tax return.
Can You Write Off Your Car Insurance Deductible?
If your car insurance is indeed tax-deductible, you may be able to write off your auto insurance deductible as well.
To do this, you will need to have paid your car insurance deductible toward a claim during the tax year in question.
If you have not filed a car insurance claim and therefore have not paid a deductible, then there will be nothing to claim for—apart from your regular auto insurance premium payments.
Which Forms Should You Use to File Your Taxes?
When the time comes for you to file your taxes, you will need to select one of two available forms.
- Self-employed individuals will need to complete the Schedule C Profit or Loss From Business form.
- Employees and business owners will need to complete Form 2106 Employee Business Expenses.
On your Schedule C form, entry number 15 is where you will insert your business-related car expenses.
On Form 2106 Employee Business Expenses, you will need to fill in your vehicle expenses from line 22 or 29.
Listing the exact expenses that you can deduct from your tax can be confusing. It is a good idea to consult a tax professional who will analyze your actual vehicle expenses and make sure you get the maximum returns.
Some things to consider when deducting car insurance from your taxes include:
Separate your personal use
If you use your car in your personal capacity, try to calculate how much you use the car for business reasons.
For example, let’s assume that you drive for a ridesharing service and spend 70% of your time driving clients around, and you have rideshare insurance.
In this case, you could be able to claim up to 70% of your auto insurance premium as well as the rideshare insurance.
Track your mileage
Make sure that you keep a logbook and track every mile that you drive in your car, and keep detailed notes of your driving history. This needs to be done for both business and personal use.
When using your logbook, record the miles on your odometer when you begin and end driving, and keep notes as to the reason for the trip.
Retain your receipts
If you fill up with gas or have any repairs done to your vehicle, keep your receipts in a safe place. When filing your taxes, you will need these as proof of your expenses.
Keep records
Up to a few years after you’ve filed, the IRS may ask you to justify your deductions from previous tax years. To avoid any issues, be sure to keep all records of your driving history for up to three years.
Is It Necessary to Have Commercial Car Insurance in Order to Claim Tax Back?
After having read this article, you may be wondering whether you can claim for personal car insurance on your tax return.
You may also be wondering whether you need commercial car insurance for business purposes.
If you have these questions in mind, now is a good time to chat with your insurance agent.
The bottom line is that if you are using your car for business purposes, you will ultimately need to switch to commercial car insurance.
This is because if you are using your car for business, your insurance company will only cover you in the event of an accident if you have commercial car insurance.
While the IRS will not penalize you for having personal car insurance, your insurance company will.
Business use—or commercial insurance—is typically more expensive than a standard or personal insurance policy.
On average, business-use auto insurance costs approximately 10% more than a personal insurance policy.
As long as you are using your vehicle for business some of the time, you will be able to use your car insurance premium as a tax deduction.
The most important requirement is to keep accurate track of your mileage and expenses to ensure you get the most out of your deduction.
You will also need to ensure that you file the correct forms with the IRS. If you are unsure about any part of the filing process, enquire with your tax professional and let them help you with your returns.
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