Can you deduct your car insurance from your taxes?
If you use your vehicle for business purposes and have a business use car insurance policy, you can deduct all necessary and ordinary costs relating to your car. The finer details — including what business-use car insurance is and what paperwork you need — is outlined below.
What is business-use auto insurance and how much does it cost?
The only way to claim car insurance as a deduction on your tax return is if you utilize your vehicle for business purposes. A business-use policy is defined rather vaguely. Usually, it involves using your standard vehicle, i.e., not a work truck, for personal and business uses. For example, a door-to-door salesperson.
Each insurance company defines business uses differently. So, if you’re uncertain, speak to your insurance agent. This will not only be important for determining if you qualify for the right deduction but making sure you're covered for your business-related driving needs.
How much does business-use car insurance cost?
Business-use insurance is usually more expensive than a standard personal policy. On average, a business-use policy costs 10% more than a pleasure-use policy.
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How to deduct car insurance on tax returns
There are a couple of ways to go about claiming auto insurance expenses as a tax deduction. While this is a brief summary of car insurance related deductions, our recommendation is to speak to a tax professional. When it comes to your personal taxes, you do not want to take any chances.
Use the IRS’ standard tax deduction:
The standard mileage rate for business use of a vehicle in 2018 is 54.5 cents per mile. You can find more information regarding this, here.
Calculate your own expenses
You will need to keep a documented track of all your car-related expenses. This includes car insurance and gas expenses. This will be helpful when you’re filing and if you’re ever audited.
If you’re self-employed and filing a Schedule C, a tax break on your insurance costs is usually available. Found here, this form is for reporting income or loss from a business you operated or are the sole proprietor of.
If you’re employed by a company and use your own vehicle, you can file a Form 2106 Employee Business Expenses. Found here, this form simply refers to filing any and all expenses that are helpful and important for the business. Bear in mind, you cannot file this if you are compensated directly by your company.
If you use your vehicle for business and personal reasons, you will need to establish and prove the usage breakdown. When it comes time to file your taxes, you’ll only be able to deduct the business-related expenses. Again, this can be fairly complicated. It’s best to consult with a tax expert to avoid any issues.
Taxes and car insurance: summary
The only time you can consider your car insurance a tax deduction is if you use your vehicle in a professional and business capacity. If you do, you should consult with a tax expert well before tax season. Keep documented expenses of your driving-related expense well before tax season. If you’re interested in learning more about car insurance, see our additional resources below.