Is car insurance tax deductible? This is a question many people ask themselves when they are looking for deductions on their income taxes. The answer is yes, but it depends on your situation.
For example, if you have an employer-provided car and the insurance is included in your benefits package, you can't deduct that expense from your taxable income.
However, if you pay for your car insurance and file as a single or head of household with no dependents, you can deduct this expense! Keep reading to find out more about this unique benefit and what else might be tax-deductible.
When can you deduct your car insurance?
There are a couple of circumstances in which you're able to deduct your car insurance:
If you're self-employed and pay for your car insurance, then it's deductible
In most cases, if you're self-employed, your car insurance is tax-deductible. Make sure to consult with a professional to make sure you're taking the correct steps.
There are a few stipulations for being self-employed and deducting your car insurance.
First, you must be filing as head of household with no dependents. Second, the policy needs to cover a vehicle used for business purposes at least 50% of the time over this calendar year. However, if these conditions are met, then it's deductible!
To claim this deduction on your taxes, you'll need an accountant who can help guide you through all the specifics, so make sure they're in good shape before submitting their report.
The IRS provides examples of deductions related to car insurance, including parking fees, tolls, transportation expenses like gas or public transit fare (but not including any costs incurred from using your vehicle), etc.
If your employer provides a company car, but the insurance is not included in this benefit package, or if they reimburse you with pre-tax dollars
If your employer provides you with a company car, but the insurance is not included in this benefit package, or if they reimburse you with pre-tax dollars, then it's also tax-deductible.
The expenses related to parking fees, tolls, and transportation fare are all considered necessary for your business (even if incurred when driving your vehicle), so these can be deducted as well.
Finally, keep in mind that if you have a higher deductible and take more responsibility for costs like car maintenance, it will reduce the amount of what is considered taxable income - so overall, these decisions can affect how much is deducted from your taxes.
If you are a self-employed contractor, then your car insurance will be 100% deductible
You can deduct the cost of insuring an auto used in part for business use or as a rental vehicle if it's not exclusively leased to customers by someone else.
The IRS says that any personal driving must occur during off-hours or on weekends, and such expenses may only be deducted up to 50%. Anything over this amount has to be added back into income for computation of taxes.
The general rule is anything with two different uses can't be combined into one expense. So, to use a housing reference, renting out your house AND having renters living there would not qualify since both items have been written in the same category (property).
You can't deduct the cost of insuring a leased vehicle because that is considered to be personal use.
This means that if you are leasing your vehicle and paying both the lease payment and purchasing an auto policy, on top of that, only one expense can be tax-deductible. But, of course, the IRS says which one is up to you!
You need to decide how much driving was used for business purposes versus personal reasons. This will help determine what expenses (insurance) should be deducted for tax purposes.
How to Deduct Your Car Insurance
You don't need to prorate your car deduction if you only use it for work. However, if you use your car exclusively for business or partly for personal purposes, the expenses can be prorated.
If you are unsure about what percentage is deductible and whether it's better to take a standard deduction or itemize deductions on a tax return, consult with an accountant.
You should also keep in mind that if property damaged during transportation is not covered by insurance (car transport), this will be considered theft, which may qualify as a casualty loss.
There are two tax forms to report your expenses; Schedule C and Form 2106. When you use Schedule C, report your car expenses on line 12. For Form 2106, fill out Part II (lines 25-27).
Summary
If you're still unsure if your car insurance is tax-deductible, talk to a tax professional. It may seem like an unusual benefit, but it can be one of the many deductions available to help lower your taxable income for the year.