When tax time arrives (and it always does) most folks hunt for every deduction they can find. You already know that your mortgage interest is tax deductible; depending on the amount, you may even be able to deduct some of your medical bills. What about your car insurance? Is this another source of deduction which you may have missed?
If you are thinking of deducting your personal car insurance, the answer is no. Personal car insurance premiums are not deductible at the federal or state level. The reason for this is simple: you do not pay taxes on your car insurance premiums, and anything which is not taxed is generally not going to qualify for a deduction.
What car insurance premiums are tax deductible?
However, there are some types of car insurance premiums which are tax deductible. If you are a business person who uses your car for work purposes, it is possible that you will qualify for a deduction of all the expenses related to your vehicle, including your insurance premiums. However, there are several “tests” you will have to pass before you can safely take those insurance premiums off your tax return.
First, you have to use your deduction for business use of your vehicle, and not for commuting to work. The way the IRS generally views this test is that if you do not have an “office” or space to work from, you are probably using your car for business purposes. You could also argue that if you have a truck or van which is devoted to deliveries or carrying your equipment from one job site to another, you are probably using your car for business purposes. What does not qualify in the IRS’s view is a daily drive back and forth to work. If they allowed that deduction, everyone who drives to work could claim he or she was using the car for “business purposes.” The implication is clear—you must be using your car in the course of your business, not simply to get there.
When figuring your mileage for work-related purposes, you cannot even include your commute as part of the deduction. In other words, if only fifty percent of the use of your vehicle is business-related, then only fifty percent of your mileage is deductible. Many business people solve this problem by keeping a mileage log beginning at the place of work and including miles traveled in the course of business. This mileage log not only lets you quickly compute the mileage you used for business, but it can also be a valuable piece of proof to the government of the legitimacy of your deduction if you are ever audited. Be careful to include your mileage starting point from your place of business and not your home, unless you operate your business from your home.
The next test you must apply is whether it is better to take the standard deduction or an “actual use” deduction. This will depend primarily on how much you drive your vehicle. The IRS allows a standard yearly deduction of $.51 per mile for all automobile-related expenses, including gas, oil, maintenance, repairs, and insurance. If you choose the standard deduction, you multiply $.51 by the number of actual miles you traveled to figure the deduction. You do not add in auto insurance premiums, repair costs, or gasoline receipts, because those are already included in the standard deduction price.
The “actual use” deduction may net you more, but it is also more complicated to figure
In an actual use deduction scenario, you must keep records of every expense related to your automobile. This would include all gasoline receipts, oil, repairs, license fees, tires, parking and garage fees, tolls, and of course your insurance premiums. You would also calculate the depreciation on your vehicle based on age and mileage. Once you have figured all that up, you would deduct the total amount as an actual use deduction from your taxes.
While this method may give you a higher deduction, it is wise to use this only if you have a vehicle which is exclusively used for business purposes. The reason for this is that it is nearly impossible to segregate the amount you use the vehicle for work, and the associated costs of repairs, maintenance, and so on, with your use on your personal time and the associated costs. For example, if you fill your car up with gas at $52.00, and drive all week for work, then take the car home and run errands or go to the beach, how do you really know how much of the gas you used for business and how much for personal use? While it is possible to figure “actual use” on a car which is used for both personal and business reasons, it is usually better and easier to simply take the standard deduction for your business mileage.
On the other hand, if you have a fleet of vehicles used only for work, such as repair or delivery trucks you send out to customers, then it may be more beneficial to take the time to figure actual use costs. Most employers who do this have some system of segregating automobile-related costs; for example, an employer might give employees a credit card to use for gas purchases for the company vehicle. This would allow an easy accounting at tax time of the amount of fuel purchased for business use alone.
If you have questions about the deductions allowed for car insurance for business vehicles, or any other deduction questions, it is best to contact the IRS before you file. While it may seem overkill to worry about small deductions, it is far wiser to get solid answers to your questions rather than risk an audit and the attendant fees, fines, and penalties associated with an erroneous filing. Further, a small mistake in this deduction could lead to a closer look at your overall return, which is going to cost you tremendously in time and worry. Saving a little on your taxes is never worth worrying about the IRS penalizing you for the deduction.