Is Car Insurance Tax Deductible?
When it comes to running a business or being an employee, there are a lot of different ways that you can save money and maximize your tax returns. One of the most overlooked expenses for tax deduction is both car insurance and car expenses! Car insurance is a necessary expense for anyone owning and operating a vehicle; in certain cases, the expenses might be tax-deductible.
Below, we will jump into an in-depth guide and discussion on the topic of car insurance tax deductions – let’s cover who can deduct them, what you can deduct and how to calculate the deduction for your taxes.
Who Can Deduct Car Expenses?
When it comes to deducting car expenses, there are a lot of variables that will contribute to whether or not you can incorporate the deduction on your tax filing; most prominently, your vehicle use. Based on the IRS guidelines, deductions are typically available to business owners, employees and self-employed individuals if they use the vehicle for business purposes.
Let’s discuss a breakdown of each eligible party and how they are or become eligible.
Self-Employed
Whether you’re a freelancer, independent contractor or small business owner, you have a ton of flexibility when it comes to car expense deductions. First and foremost, your vehicle must be used for business activities like meeting up with clients or traveling to job sites or locations. Based on those requirements, you can deduct expenses about the vehicle mileage or the actual expenses themselves – this would include car insurance as a deductible expense.
Regardless of the selected methodology, you should keep receipts of the transactions throughout the year to support your deductions.
Employees
If you are an employee, it is a bit of a different process than if you were self-employed – generally speaking, there will be more restrictions on what you can deduct. While there used to be the ability for employees to deduct unreimbursed car expenses related to their job (like travel, for example), a recent Act in 2017 suspended that deduction until 2025. With that said, there are some exceptions for certain jobs like armed forces reserves and certain government officials which might allow you to deduct your unreimbursed car insurance and other costs related to your role or travel for the job.
Business Owners
Similar to being self-employed, business owners have a ton of flexibility to deduct a significant amount of their vehicle expenses on their taxes. If you own a company car, you can deduct anything remotely associated with operating the vehicle – this goes all the way down to gas and general maintenance costs. Car insurance, of course, is included on the list of deductions that you can make on your company vehicle!
Unique, Individual Cases
As is usually the case with taxes, there are plenty of unique and individual cases that might allow you to deduct your expenses from your taxes. Be sure to look into your specific circumstances, it doesn’t hurt to check!
What Can You Deduct?
So, what exactly can you deduct if you fit one of the listed criteria above? Well, it is very dependent on your particular circumstances and scenario. Assuming you are a business owner using a vehicle for said business, you can deduct essentially everything related to the vehicle on your taxes. This includes car insurance, gas, mileage, maintenance and even depreciation.
Now, on the contrary, if you are an employee of a business and are looking to figure out the deductions that apply to you, you will be saddened to see that there are a lot more restrictions and limitations. Typically, you will not be able to deduct your car insurance, maintenance, repairs or anything of the like. Depending on what you company does or does not reimburse (and based on your role and the ongoing legislation) you might be able to deduct your unreimbursed mileage.
Regardless, it is recommended to consider your personal situation and understand what that position allows you to deduct. Your personal experience might be different from your neighbors or your friends – just because they can deduct it doesn’t mean that you can!
How to Calculate Your Deductions
Half of the battle is knowing whether or not you can take any deductions for your car – the other half of the battle is knowing how to calculate the deductions that you can take. Assuming you can take deductions, there are two different ways to calculate it; let’s briefly cover both below.
Standard Mileage
If you use the standard mileage deduction, you will simply reference the latest IRS standard mileage pricing which will dictate the amount of cents deducted per mile driven. You will still need to keep track of the miles driven for personal versus business use, as you can only deduct your business usage.
Actual Expenses
On the other hand, you can deduct based on the actual expenses that you pay on your vehicle. This includes the full-year payments for insurance, repairs and virtually anything else that you pay for your vehicle.
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