When is auto insurance tax deductible?
If you use a car for business-related purposes (other than as an employee), many expenses associated with that vehicle may be tax deductible as business expenses, including your auto insurance premium. However, there are certain caveats to keep in mind. For instance, commuting to and from work isn't considered a business expense.
Important note: You don't need to itemize your deductions in order to claim business-related vehicle expenses. These deductions are generally claimed on Schedule C, Profit or Loss From Business.
Is car insurance tax-deductible for self-employed people only?
Self-employed people make up the majority of those who may deduct their car insurance premiums, but they're not the only ones who qualify. For example, reservists in the armed forces who travel up to 100 miles from home can deduct their auto insurance premiums, as can qualified performing artists and fee-based state or local government officials.
How can I deduct car insurance on my taxes?
If you qualify, you can either (1) deduct all your business-related vehicle expenses, including your car insurance premium, or (2) deduct an amount based on the actual miles you drove for your business using a cents-per-mile rate. These are known as the Actual Expenses method and Standard Mileage method, respectively.
You can choose either method and change from year to year without penalty. You can tally your expenses based on both methods and then choose the one that yields the higher deduction. Keep in mind that you can only use one method. If you do choose the Actual Expenses method, you can generally deduct the following from your taxes alongside your car insurance premium:
- Fuel and oil
- Car repairs
- Lease payment
- Registration fees and licenses
- Tolls and parking fees
When it comes time to file your taxes, you'll use one of two forms. Self-employed individuals will use Schedule C: Profit or Loss From Business to deduct car-related business expenses, including insurance. If you're not self-employed and otherwise qualify for a deduction, you'll use Form 2106 Employee Business Expenses to list relevant costs.
Tips for deducting car insurance from your taxes
- Separate any personal usage: If your vehicle isn't used solely for work, track the percentage you use the car for business purposes. Suppose you drive for a ridesharing service and spend 70% of your time driving clients around. In that case, you could potentially claim up to 70% of your auto insurance premiums.
- Track mileage: If you're going to claim deductions, be sure to keep track of every mile you drive in your vehicle, both business and personal. Record starting and ending mileage every time you travel and keep notes on the reason for the trip. Mileage tracking apps are useful tools.
- Hold onto receipts: Keep receipts for any business-related automotive expenses, including those for gas and repairs. You'll need these as proof when filing your taxes.
- Keep your records: You may be asked to justify your deductions from previous tax years, so it's wise to keep any records of your driving history for at least three years.
Do I need to itemize my car-related tax deductions?
Itemizing deductions may increase the cost of tax return preparation due to the number of forms involved. The good news is you don't have to itemize to claim your auto insurance premiums or your mileage as business expenses. These deductions are generally claimed on Schedule C, Profit or Loss From Business.
When you itemize deductions, you break down your expenses that can be subtracted from your adjusted gross income, such as mortgage interest or charitable donations. That reduces your overall taxable income to reduce the final amount you owe. Itemized deductions are listed on Schedule A of Form 1040.
What other auto-related tax deductions are there?
Business-related car expenses aren't the only items you can deduct from your taxes. There are many other potential options available, such as:
- If you donate an old vehicle to charity and itemize deductions, you may be able to claim a charitable contribution deduction.
- If you itemize deductions and primarily use your vehicle to drive yourself or a loved one for medical reasons, you may be able to deduct auto-related expenses on Schedule A under itemized medical expenses.
- If you itemize deductions, you may be able to deduct personal property taxes on your vehicle, subject to an overall deduction cap on state and local taxes.
- You may be able to receive a tax credit for purchasing an electric or hybrid vehicle.