April 15, a day many Americans dread, sneaks up on us faster than we would like. The day we turn over a large portion of our hard-earned cash to Uncle Sam is not a day that many of us look forward to. If anybody tells you they enjoy paying taxes, they are lying through their teeth. Fortunately, for many of us, our accountants can play around with the numbers, work their magic, and lower our taxes by a slight margin. They do so by deducting expenses: which brings us to the topic of this article – are the auto insurance premiums that you pay every month tax deducible?
They say there are three guarantees in life – birth, death, and taxes. If you live in the United States and drive a car, you can add a forth to the mix: auto insurance expenses. Here in the US, the government forces all cars on the road to have a valid auto insurance policy before they are driven. While it’s definitely a smart idea to have auto insurance, the monthly cost of it can definitely put a large hole into your savings. If you are hoping that paying through the nose for insurance doesn’t go without merit and that you can deduct this expense when you file your taxes, you might be in luck. In certain situations, you can deduct your car insurance costs from your taxes.
When You Can Deduct
If you find yourself in the following circumstances, you may be able to deduct your auto insurance costs from your taxes. Keep in mind, however, that before you take our word on anything, you should first consult your accountant.
If you drive your car for business, you are most likely eligible for a tax deduction. This deduction is available if you are self-employed and use for car for business purposes. To take advantage of this tax break, list your yearly auto insurance premiums as an expense on Form 2016 under Employee Business Expenses. Of course, you first need to calculate the deduction rate from the IRS, and if you are unsure of how you should do this, you should consult your accountant first.
To get an idea of how these deductions would work for a self-employed individual, consider these two examples:
- You are a plumber. 70% of the miles you drive are spending driving to and from your clients’ homes or to Home Depot to pick up supplies. The other 30% of the miles are for your personal use. In this situation, 70% of your auto insurance premiums would be tax deductible.
- You are a wedding photographer and drive 20,000 miles per year. 10,000 miles are for personal use and 10,000 miles are spent driving to the weddings you are photographing. In this situation, 50% of your insurance premiums are tax deductible.
If you are an employee and your employer requires you to drive for business reasons, you are also qualified to deduct your car insurance rates. However, if you employee reimburses you for your auto insurance premium costs, which they often do, then you cannot claim these as a “business expenses” on your tax forms. To double-check what you are allowed to claim, ask your employer as he or she most likely has a solid understanding of the situation.
If you only drive your car for personal reasons, like driving to school, driving to your job, doing errands, going shopping, driving to the gym, etc. you cannot deduct your auto insurance premiums. Although you may consider using your vehicle to drive to work as a “business expense,” the US government does not. Even if you drive your vehicle as a part of your daily commute to and from work, the IRS still views that as personal-use.
If you use your car for both personal and business reasons, you can deduct the portion of the insurance expenses that are used for the business. If you are going to make deductions using this method, it’s very important to keep detailed records of your business travel, including when you used the car, for how many miles you drove the car, and the specific reason for driving the car.
We are all eager to save money, but writing things off on your taxes is serious business and requires caution. As with all advice given in this column, do not take exclusively take our word for it. As with all tax and legal advice, you should always consult with an attorney or an accountant. To find an licensed tax account in your area, visit the Amercan Institute of CPA’s website.