Is Car Insurance Tax Deductible?

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The answer to the question, is car insurance tax deductible, isn’t just a straight forward yes or no. It depends on your situation, as a self-employed individual may be able to deduct car insurance, while a non-business owner may not. Here’s a look at a few of the scenarios and whether or not car insurance will be tax deductible in each scenario.

W-2 Employees and Salaried Employees

If you work full time as a salaried employee or W-2 employee, you may be able to deduct some of your car insurance. Maybe you use your vehicle to run errands for your employer or you commute from a long distance to work. If your employer doesn’t reimburse you for your car expenses, you may be able to deduct 15% of your insurance premiums.

However, if you’re a W-2 or salaried employee and you don’t run errands or use your vehicle for work, you won’t be able to deduct your premiums.

Business Owners

As a business owner, you may be able to deduct a portion of your car insurance premiums on your taxes. If you’re a sole proprietor and at least 60% of the miles you drive are for business purposes, you can deduct a portion of your auto insurance premium. The portion you can deduct will depend on how much you use the vehicle for business purposes compared to personal purposes.

Freelancer or Contract Worker

As a freelance worker, if you use your vehicle to travel to and from clients homes or to meet in public with clients, you may be able to deduct a portion of your auto insurance premiums. Usually, you can deduct the percentage of your premium based on how much you use the vehicle for business. For example, if you drive to and from client’s homes half the time, you can deduct 50% of your insurance premiums.

Types of Deductions

As a business owner, freelancer or contract worker, you will have options when it comes to your deductions. You can use a standard deduction or an itemized deduction for all driving-related expenses including car insurance.

The standard deduction will allow you to gain a deduction based on the mileage you drive the vehicle for your business. This will help to cover the fuel, car insurance, repairs, tolls, parking fees and other vehicle expenses.

When you take an itemized deduction, you will need to report all of the actual expenses for the vehicle. This is usually done when you drive a rather expensive vehicle and the costs are higher than the per-mile deduction. Make sure you keep track of everything if you plan to use the itemized deduction for vehicle expenses.

The best choice is the one that provides the most advantages on your taxes. It’s best to keep track of all the expensive you have associated with your vehicle and see which type of deduction is best when you have your taxes done.

What Can’t You Deduct

As an employee, you won’t be able to deduct any vehicle expenses if your employer reimburses you. Those with a home office will also not be able to deduct the first and last rides of the day because these are taking you to and from home. They are considered your commute and the expenses are related to a regular commute.

While some vehicle expenses cannot be deducted, in some scenarios, you can deduct your car insurance. As a business owner or freelancer, car insurance is tax deductible. In some other scenarios, a portion may also become a deduction on your taxes.