Tips For Deducting Car Insurance From Your Taxes
- 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.
Determine How You Use Your Vehicle
The first step in determining whether or not you can write off your insurance premium or deductible is to figure out how you use your vehicle. Some business owners or self-employed individuals may use their vehicle for business only, while others use theirs for both business and personal reasons. For example, Uber drivers probably use the same vehicle to transport people as they use to run errands or pick their kids up from school. In this instance, the driver will need to calculate their mileage or take the standard deduction only for the portion of their driving that is business-related.
If you’re using your vehicle to commute, you can’t write off any of your expenses. On the same note, if your company reimburses you for mileage or other vehicle-related expense, you also cannot write off your insurance premium or any driving-related expenses. Some of the most common business and job-related industries that can use insurance premiums as a tax write off include:
- Delivery drivers
- Media personnel
- Ride-share drivers
These are just a few examples of drivers that may be able to deduct car insurance premiums and deductibles from their taxes. Just keep in mind that unless you’re using your vehicle exclusively for business, you will need to track the amount of time your vehicle is being used for business or for work-related driving for which you are not being reimbursed.
If You Use Your Car Strictly For Personal Use You Likely Cannot Deduct Your Car Insurance Costs On Your Tax Return
Unless you use your car for business-related purposes, you are likely ineligible to claim your auto insurance premium on your tax return. Business-related purposes may include using your car to pick up or deliver business supplies, driving to visit clients, or driving to a business conference. Simply commuting to and from work, however, does not count as a business-related purpose.
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What If My Car Is Used For Both Business And Pleasure
If you use your vehicle for business purposes only, you may have an easier time filing your taxes since you wont have to figure out the split between your business and personal use. Using your car for both business and pleasure use can make things a bit trickier. If your car is used for both business and personal purposes, youll need to use the standard mileage rate to calculate how much you can write off. The standard mileage rate is the cost-per-mile measurement approved by the IRS for various business uses. It gives approved cents-per-mile expenses for different uses of vehicles, like driving for business or medical purposes. The standard mileage may be updated each year, so make sure to check the current rates before filing.
For part-time rideshare drivers, such as drivers for Uber or Lyft, you may have purchased an insurance endorsement. Rideshare endorsements generally give you coverage while your app is on and you are looking for a passenger, but remove coverage once someone gets in your car at that point, Uber or Lyft take over responsibility. In those cases, the rideshare insurance add-on may be considered a business expense, and the associated cost could be tax-deductible.
More Miles More Money
Mileage is the biggest deduction, Schrage noted, adding, “Although it may not seem like much, it adds up.”
If you drive from your usual work site to another job-related destinationa sales meeting, to get office supplies, or to the airportthose miles may be deducted. “If you have been temporarily reassigned to another work location that is farther from home, you can deduct the extra distance, he said. If your employer reimburses you for mileage, however, you cannot deduct these expenses on your taxes.
The per-mile rate for 2021 is 56 cents for business miles driven. For the first half of 2022 the rate is 58.5 cents per mile and increases to 62.5 cents per mile for the last half of 2022. For more information, refer to IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses . For a list of current-year and prior-year mileage rates see “Standard Mileage Rates.” There’s a separate table for those who lease their vehicles. If you are self-employed, you may either deduct your exact expenses or use the optional standard mileage rate to calculate deductions.
If youre using your vehicle, say, 75 percent of your time of use for business, that same percentage of all of your auto expenses are deductible,” says Block.
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How Do You Calculate The Difference Between Personal And Business Use
Do you use your vehicle for personal and business use?
If so, then you need to differentiate the personal and business usage of your vehicle. This is because drivers can only write off a portion of their business-related expenses, not personal expenses .
Calculating the business use of your vehicle may seem like a challenge, but it’s quite simple all you need to do is keep a detailed log of your travels.
At the beginning of the fiscal year, take note of the kilometre total on your vehicle’s odometer. This gives you a base number to work with in the future.
Once this is done, make sure that you note the kilometre total before and after you use your vehicle for self employment. You then need to subtract the first total from the last total. Doing this will help you determine the total amount of business-related kilometres that you drove that day. Complete this step every time you use your vehicle for self employment.
At the end of the year, be sure to note the total number of kilometres driven on the odometer and add up all of the business-related kilometres that you’ve travelled. Next, you need to divide the business-related kilometres by the total number of kilometres and multiply that number by 100.
Doing this will give you the percentage of your vehicle-related expenses that you can deduct from your taxable income.
How Can I Get Car Insurance
Comparing quotes from different companies is a great way to find affordable car insurance. It is important to have a basic understanding of your car and the coverages you want before you start comparing quotes from different companies. For a deeper look at how to get car insurance, consider the Bankrate guide.
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Do I Need To Itemize My Car
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 Happens If I Use My Car For Business And Pleasure
Drivers whose vehicle is used for business or personal purposes can have some difficulties. You can often calculate how much the vehicle is being used for business and personal purposes, and then write that amount off as a business expense. Drivers may not be allowed to use the vehicle for business purposes if they are restricted by minimum insurance amounts.
Special insurance policies are required for rideshare drivers such as Uber and Lyft drivers. These policies can only be active while the vehicle remains in use. These policies often include additional coverage for passengers in order to account for the vehicles taxi-style use. These policies are considered business expenses and therefore tax-deductible.
You will need to fill out either a schedule C form or a 2106 form when you file your taxes. The first form is for people who have a traditional employer. The second is for self-employed drivers or those who rideshare with Uber or Lyft.
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When Car Insurance Can Be Tax Deductible:
There are a number of instances to claim your car insurance on your taxes. They include:
- If you use your car for business Whether youre self-employed and use your car for business purposes or your employer doesnt reimburse you for expenses related to business use of the car.
- If you suffered a vehicle loss or theft You may be able to claim loss deduction if your car was stolen or deemed a total loss. In order to qualify for this kind of deduction, you typically have to file a claim, ensure the accident wasnt a result of your negligence, your insurance company cannot completely reimburse you for the loss, and your costs must be greater than $100.
No Matter How You File Block Has Your Back
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Who Can Deduct Auto Insurance From Their Taxes
Car insurance is tax-deductible if you are self-employed and drive your car to business-related locations outside of your daily commute. For example, if you work as an independent contractor for a company such as Doordash, you can deduct the time you use your vehicle for deliveries.
Other individuals eligible for this tax deduction include:
- Those in the armed forces traveling 100 miles or more away from their home
- Verified performing artists
- Local government officials
If you use your car to travel to and from work, it is not tax-deductible. You also cannot deduct your car expenses if your employer reimburses you in any way for the costs associated with the vehicle.
Medical Home Improvement Deductions
You may make home improvements or upgrades for medical reasons. In that case, you may qualify for additional tax deductions. Medical home improvement could include adding ramps, installing elevators, widening doorways, installing handrails and more. The main requirement to qualify for this deduction is to be able to prove you have a medical reason for requiring the upgrade.
Youll need to itemize your taxes using Schedule A of the 1040 form to claim this deduction. You can only claim medical improvement expenses that surpass 10% of your adjusted gross income. If the improvement increases your homes value, youll also have to subtract that value increase out of the amount you claim.
For instance, you might install ramps in your home and spend $20,000 doing so, but they may only increase your homes value by $7,500. In this case, you can only deduct $12,500 . This deduction can get a little complicated, so talk to a qualified tax specialist to help you better understand which improvement qualifies for this tax break and how much you can claim for each improvement.
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Other Groups Can Write Off Car Insurance
Self-employed professionals and small-business owners aren’t the only people whose car insurance premiums are tax deductible. If you’re a reservist with the U.S. armed forces and need to travel more than 100 miles away from home, these travel expenses can be deducted.
Further, some performing artists and local officials are allowed to deduct car insurance costs. In short, make sure you do your research and speak with a tax pro if you think you might be able to write off your auto insurance premium.
Are You Still Feeling Confused
Don’t fear this simple example should help clear things up:
Let’s imagine that a driver has accumulated 25,000 km over the past fiscal year. Thanks to their driving log, the driver is able to determine that approximately 7,500 km were related to self employment.
When you divide 7,500 by 25,000, you get 0.3. Doing this simple equation shows us that the driver can write off approximately 30% of their car insurance expenses for that year. If said driver paid $2,000 for auto insurance, they would save roughly $600.
With this in mind, it’s clear why so many self employed Canadians take the time to calculate their usage at the end of every fiscal year.
Bonus tip If you’re employed by a business and meet the criteria listed above, you will follow the same steps as a self employed worker.
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Is It Possible To Get An Income Tax Benefit On Car Insurance Premiums
People usually know that a part of their health insurance premium is tax exempted. But did you know that car insurance deduction under income tax is also allowed? Of course, this comes with pre-defined conditions. But it is possible to get a tax benefit on motor insurance if you use the car for business purposes. Here is a list of when you can or cannot claim a tax benefit.
Is Car Insurance Tax
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.
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Allowable Motor Vehicle Expenses
If youre an employee, you must meet four conditions before you can claim car insurance premiums as a tax deduction. The Canada Revenue Agency spells these conditions out specifically:
Are Life Insurance Premiums Tax
Life insurance can help you provide a measure of family security for your loved ones if something should happen to you. You may be wondering whether life insurance premiums are deductible on your tax return, and the answer is generally no. But premiums are deductible as a business-related expense .
The death benefit is generally tax-free for individual policy owners and their beneficiaries.
Although death benefits for business-related beneficiaries are often tax-free as well, there are certain situations in which the death benefit for corporate-owned life insurance can be taxable. However, employers offering group term life coverage to employees can deduct premiums that they pay on the first $50,000 of benefits per employee, and amounts up to this limit are not counted as income to the employees.
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Preparing For Tax Season
Just remember the golden rule of getting ready for tax season keep great records. Consult a tax professional if you have specific questions about deducting your car insurance or other auto-related expenses from your taxable income, and read more about finding the right auto insurance for you here.
Senior Managing Editor & Auto Insurance Expert
Anna Swartz is a senior managing editor and auto insurance expert at Policygenius, where she oversees our car insurance coverage. Previously, she was a senior staff writer at Mic.com, as well as an associate writer at The Dodo.
Certified Public Accountant
Amy Northard, CPA, is a certified public accountant and a member of the Financial Review Council at Policygenius. Previously, she served as a certification administrator for the National Association of Mutual Insurance Companies .
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