This year’s tax season is fast coming to a close, but as you prep your last-minute filing, Quoted has an unexpected tax deduction for you to consider: your car insurance premium. As always, check with a tax professional during filing season to be absolutely sure (much like Texas, you shouldn’t mess with the IRS), but here are some reasons for which you may be able to get a little more green, this or next spring.
First, the easy answer, straight from the IRS-horse’s mouth:
If you use your car for your business, you can generally deduct all necessary and ordinary costs related to your car, including the insurance premium.
Now, the details:
If you don’t use your vehicle for business purposes (commuting to a job doesn’t count, unfortunately), you cannot claim your car insurance as a deduction. However, if you use your vehicle for your own personal business, or for job duties related to your employment, you probably know you can claim all expenses associated with running and maintaining your vehicle, and Quoted will tell you how to add your vehicle’s insurance to the list, too.
If you aren’t taking the IRS’s standard tax deduction and instead choose to calculate all of your actual expenses for the year, keep documented track of the car insurance you pay as well so you can file it with your return. As with all things taxes, a paper trail of written proof (receipts) is essential, both when filing and in case you’re (knock on wood) audited. Now let’s get technical: A tax break on your insurance costs will usually be available if you’re self-employed and filing Schedule C. If you’re employed by a company and use your car or truck for business purposes, and you file Form 2106 Employee Business Expenses (and do not collect reimbursement for mileage or expenses) you will likely also be able to claim your insurance as a deduction.
If you use the same vehicle for both business and personal purposes, you’ll have to figure out (and be able to prove) how much you use the car for work and how much you use it for pleasure (also known as “driving the kids to soccer practice”). You’ll want percentages of each, and when you claim, you’ll only be able to deduct costs associated with the percentage the car was used for business. If you use your car solely for business during certain hours of the day, on certain days of the week (say Monday through Friday, 8-9 drive kids to school, 9-4 get down to business, 4-6 pick kids up, grocery shop, park for the night), your record-keeping job will be easier (in our example, you’ll claim 6 hours business and 3 hours personal use per day, or 2/3 of expenses for business). It also depends how your vehicle is used for your business. If you use it for a delivery service, you’ll probably be able to claim most costs associated with using and maintaining your car—including the insurance. However, if your car isn’t used much during the day-to-day functions of your business, your potential claims will be smaller. Just like there’s no crying in baseball, there’s no estimating with the IRS: if you can’t prove something definitively on paper, you can’t claim it.
Keeping (Tax) Tabs
For recordkeeping tips, first read this, then ask a professional (or your cousin, the accountant) to explain it to you. But seriously, as with all complicated tax filing issues, it’s better to figure out (and really understand) what you can deduct during the year (now, as opposed to next tax season) so you can keep proper track of receipts as you go, rather than trying to piece it all together the weekend before your tax filing appointment.
We can’t stress this enough: at Quoted, our business is car insurance, not taxes, so if you’re planning to claim car insurance costs for the first time, we urge you to consult a tax professional rather than make guesses with one of those free online filing sites. But now you know the questions to ask, the papers to retain, and you can keep your accountant on their toes with your knowledge of what deductions you’re entitled to receive.
And if you’re looking for a seriously easy way to file your taxes with professional help? Check out San Diego-based startup Common Form. The cost is just $9.99 if you get a refund; free if you owe the feds. Trust us: You’re welcome.