If you are self-employed and use your personal car for business, you are eligible to deduct a portion of your personal car insurance premiums. However, you cannot deduct the entire annual cost of the personal car insurance because you also use your car for personal use as well.
The portion of personal car insurance that can be deducted can be determined by analyzing the percentage of business miles the car is driven annually.
For example, if your personal vehicle is driven 20,000 miles this year and 15,000 of those miles were qualified business use miles, you could reasonably conclude that 75 percent of the miles driven were business miles, and 75 percent of the annual cost of personal car insurance could be deducted on your tax return as an expense.
However, there are other factors that can determine if and how car insurance premiums can be deducted. For some businesses, it is more beneficial to take the actual expenses of the car as a deduction. This would include the annual depreciation of the vehicle, gas, oil changes, repairs, new tires and car insurance.
Other businesses will benefit more by taking a mileage deduction and not counting actual expenses. This could be because the miles driven happen to outweigh the actual repairs on the vehicle. Or, it could be that this method of expense deduction is simply more convenient and much more simple to track.
If you decide it is more beneficial to use actual car expenses, you should be able deduct all or a portion of your personal car insurance premiums and all of your commercial car insurance premiums. However, once you decide your method of deduction, it cannot be changed from year to year. If you choose actual expenses, you will have to stick with actual expenses.
When Your Car Insurance Premiums Cannot Be Deducted
There are certain circumstances when car insurance premiums cannot be deducted on your tax return even though other car-related deductions are allowed. Some examples of this are:
- Medical travel
- Moving expenses
- Charitable service
If you have medical issues that require you to visit a doctor, your car would need to be covered by insurance when you are driving to your medical appointments. However, the cost of the car insurance is not deductible as a medical expense on the tax return. Instead, you may deduct the medical mileage driven.
If you are moving for the purpose of a new job and your move is more than 50 miles from your old employer, you are allowed to take certain travel deductions. Many assume that one of the deductions you can take is the portion of car insurance that covered your vehicle during the move. Unfortunately, you are only allowed to deduct the mileage driven and toll fees.
The tax code does not allow for any car insurance expenses related to a move.
While car insurance is necessary when volunteering for an organization, you are not allowed to deduct the car insurance premiums used during the charitable miles driven. Instead, you are allowed to take a charitable miles deduction on your schedule A.
While there are many rules and regulations which govern the deduction of car insurance premiums on a tax return, the best way to determine deductible eligibility is to talk to an experienced car insurance agent and certainly your tax preparer. A great car insurance agent will be able to advise you on possible deductions that could help to offset the cost of insurance and save you money in the long run. Make sure you shop around and use an online comparison tool to make sure you are finding the best rates for you. Start comparing car insurance rates now by entering your zip code in our FREE tool below!