IS AUTO INSURANCE TAX-DEDUCTIBLE?

4 May 4 MINS READ
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If you operate a business or use your vehicle for work, you might have gotten all curious about this at some point. When it comes to deducting your deductible, things could get a little complicated and there are a few things you need to know.

In this article, you'd get answers to your question and also learn when and how to deduct auto insurance when filing your taxes.

Let's get right into it!

WHAT IS TAX DEDUCTION?

Tax deductions are claims made to reduce taxable income resulting from a taxpayer's various investments and expenses. As a result, taking an income tax deduction lowers your overall tax payment. It is a type of tax benefit that allows you to save money on your taxes. The amount of tax you can save, however, is determined by the sort of tax benefit you claim.

WHEN IS AUTO INSURANCE TAX-DEDUCTIBLE?

Your eligibility for auto insurance tax deductions is determined by the specifics of your employment status. All expenditures related to the vehicle, including gas, maintenance, and insurance premiums, are deducted as business expenses if you own a car that you use exclusively for work. For instance, if you are a self-employed contractor who needs to transport materials in a truck, which can be costly to insure, you may be able to deduct your insurance premiums from your taxes.

Of course, your car expenses (including insurance) might not be tax-deductible. In a few common scenarios, here's what to expect:

1. If You Are Self-employed

If you work for yourself and use your car for business or a job, you'll most likely be able to deduct at least some of your car insurance costs from your taxes. And that's not all. Provided you use your car for work, there are a ton of other vehicle expenses you could be entitled to deduct in addition to auto insurance. These include parking, tolls, gas, tires, repairs, and lease payments.

2. If You Own A Business

Businesses that own and rely on the usage of company automobiles or a fleet of vehicles can deduct auto insurance as a business expense if it is for their trade, business, or profession, according to the IRS. Extra excursions to pick up supplies, attend meetings, travel to visit clients, or attend a work-related event, such as a conference, are all examples of work-related uses for your car. Traffic ticket fees are never tax-deductible, so if you got a speeding ticket while hurrying to a business function, that's a no-go.

3. If You Use For Personal Use Only

You usually can't deduct your car insurance premiums from your taxable income if you use it largely for personal purposes, plain and simple!

4. If You Use For Both Business And Personal Purposes

If you drive a car for both personal and business purposes, only the percentage used for business purposes is tax-deductible.  Even if you only use your car to commute between work and home and nothing else, it is unlikely to be eligible for tax deductions. In general, only driving done during your business hours and for business purposes is eligible. While you can't deduct your commute to and from work, you can deduct work-related driving expenses like visiting clients or picking up supplies. If you drive your car for business half of the time, you can deduct half of your annual auto insurance costs from your taxes.

HOW TO DEDUCT AUTO INSURANCE WHEN FILING TAXES

Now that you know you can deduct car insurance, let's talk about the how. You stand a chance to add part or all of your auto insurance costs to your business expenses when filing your taxes, and you won't have to prorate your deduction if you use your car primarily for business. However, many people use their cars for both personal and commercial functions. As such, if you are wearing those shoes, you'll have to divide your spending between personal and business use based on the miles you drive to figure out what pertains to your taxes. For example, if 70% of the miles you drive are for business, and the other 30% are for personal, you’ll generally be able to apply 70% of your expenses to your deduction.

Self-employed people and rideshare drivers like Uber and Lyft must complete a Schedule C form, that includes auto insurance expense reporting. Otherwise, you fill out Form 2106. You can find both forms on the IRS website.  These forms allow you to report auto insurance premiums and deductibles as a business expense.

WRITING OFF YOUR AUTO INSURANCE DEDUCTIBLE

You may be able to write your auto insurance deductible off if your automobile insurance is tax-deductible. This write-off is only possible if you paid the deductible during the tax year, and it only applies in certain situations. Apart from regular premium payments, there is nothing to record if you have not filed a claim or paid your deductible. Now if you incur a financial loss as a result of a calamity, you may be able to deduct it from your taxes. You cannot, however, deduct any loss for which you were compensated, such as through insurance. To put it another way, you can only do this for the amount of money you truly lost.

KEEPING RECORDS FOR TAX FILING

If you want to deduct your auto insurance costs from your yearly tax bill, you'll need to be a good record keeper. Now here's why. Take for instance how flexible ridesharing gets. You could be driving for 4 hours one day, 8 hours the next, and an hour the next. Knowing how much you drove during the year can be tough unless you keep a consistent track throughout the year if you drive occasionally for your business.

What you need to do is to make a list of all the times you drove on the clock, as well as a decent approximation of all the times you drove off the clock. And please, keep these record for at least 3 years. You don't want to be clueless if the IRS ever asks you to substantiate your auto insurance tax deductions, do you?

BOTTOM LINE

Just remember keeping a good record is king when it comes to preparing for tax season. It's also nice to have a certified public accountant or tax professional go over the IRS criteria for business expenses and make sure you're eligible for these and other tax deductions. IRS.gov has got the most up-to-date tax information. Please read over your auto insurance policy to be sure you have all of the coverages you require.

Do you want to learn more about auto insurance? You'll find all you need to know right here.

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