Deducting your car insurance at tax time can help you save money, but how do you know if you’re eligible for the deduction? In many cases, self-employed individuals will benefit, but there are a few things to know before filing your taxes.
Is Car Insurance Tax-Deductible?
Is car insurance tax-deductible? The short answer is yes, but you must first meet certain requirements. Insurance can get expensive, and one of the ways you can recoup the cost is to maximize your tax deductions. Car insurance is one of the allowable insurance deductions, but it’s important to know the guidelines for when you can and can’t claim your insurance premiums as a deduction.
What’s a Deduction?
A tax deduction is a dollar amount you subtract from your annual taxable income when you file your taxes. It reduces your taxable income, which can lower the amount you have to pay in taxes.
Is Car Insurance Deductible for Self-Employed Individuals?
If you’re self-employed and use your car exclusively for business, then all costs associated with the vehicle, including the insurance, are deductible. Each insurance company defines business use differently, so if you are not sure how your provider will classify your vehicle, contact them to find out. It is important to do this because it determines if you qualify for the right deduction.
If you are self-employed and drive your car for both business and personal use, you can write off some of your insurance premiums. You can determine the exact amount by calculating the percentage. For example, if you use your vehicle 50% of the time for work and 50% of the time for business, you can deduct 50% of your annual insurance premium from your taxes.
What Does Work or Business-Related Use Include?
A car you use to commute to and from work does not qualify as a business expense, so you cannot deduct the insurance premiums you pay for that vehicle from your taxes.
If you use your personal vehicle to drive for a rideshare company such as Uber or Lyft, you might need special insurance. You can deduct the entire premium for this added coverage. In addition, if your state allows you to use your personal insurance while driving, you can deduct a percentage of the premiums. Just divide your monthly car insurance premium by the percent of the time you use your personal car for ridesharing.
Rental home owner
If you own a home with renters or rent out your home as a vacation property, you can deduct a percentage of your car insurance premiums. You’ll need to determine the amount of time you spend driving to and from the house for upkeep and maintenance, cleaning up after guests, or letting guests in.
Is Car Insurance Deductible if You’re Not Self-Employed?
If you are a W-2 employee, you can still deduct your car insurance from your taxes in some circumstances. The list is short, but the types of employees who can deduct their insurance include:
- Armed forces reservists who travel up to 100 miles from their home
- Qualified performing artists
- Local government officials or fee-based state officials
If you are one of these employees, it’s important to know you can only deduct your insurance premiums from your taxes if your employer does not plan to reimburse you for any expenses that result from the business use of your car.
If you are an employee and don’t fit into one of these three categories, you cannot deduct your car insurance from your taxes. The Tax Cuts and Jobs Act changed many of the deduction rules over the past few years, and standard employees can no longer benefit from auto insurance deductions.
Can I Deduct Car Insurance if I Deduct Mileage?
You can not deduct both your insurance premiums and the mileage you drive for work. You must choose either expense.
It is important to do your research before deciding if you want to deduct mileage or expenses. You can’t switch from using the expenses deduction to the mileage deduction unless you sell or trade in the vehicle. If you choose mileage, however, it is possible to switch to the expenses deduction in a subsequent year if it would yield a larger deduction.
How Do I Deduct My Car Insurance?
Once you determine your car insurance is tax-deductible, you might wonder how the process works. As mentioned, you first need to decide if you will deduct mileage or expenses. Then, when tax time arrives:
- If you are self-employed, use a Schedule C: Profit or Loss From Business form. This form allows you to deduct your car-related expenses, including your insurance premiums.
- If you are not self-employed, file a Form 2106 Employee Business Expenses. This form allows you to list any relevant costs incurred while driving your personal vehicle for business use.
Tips for Deducting Your Car Insurance
The best way to maximize your deductions is to stay organized by doing the following:
- Separate the usage. If you don’t use your vehicle entirely for work, keep track of the percentage of time you use it for business. For example, if you work as a contractor and must travel to businesses for work in your personal vehicle, keep a record of this time.
- Track your miles. If you want to claim the mileage deduction, you’ll need to keep track of how many miles you drive for business and how many you drive for personal use. Mileage tracking apps can make this easy.
- Keep receipts. Keep all your receipts for business-related expenses for your car. You’ll want to keep receipts for everything from gas to repairs.
If you are self-employed or a business owner, you can benefit from deducting your car insurance at tax time. Make sure to keep detailed records and assess whether deducting all expenses or just the standard mileage rate is the best option for you.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.