Car insurance is tax deductible only if you use your car for business. What that means is a little complicated however. It's not always clear what is considered a 'business' car, so we'll discuss in this article all the situations where you may deduct your car insurance from your taxes.
When is Your Auto Insurance Tax Deductible?
If you drive a car as part of your business, then all associated costs--gas, maintenance and insurance are all tax deductible. Your car needs to be a function of your business. For example, if you are a self-employed contractor, and have a truck (which may be expensive to insure) to carry your supplies place to place, then you may deduct your car insurance rates from your taxes.
There are some crucial nuances you need to know though before you go ahead and write off your car insurance. Just because you drive your car to work, that does not make it tax deductible. If you work in an office all day, your car is not crucial to your day to day operations so you can't write off any car related expenses. You also will not be able to write off your car insurance if your business or employer already reimbursed you for the costs.
You Can Partially Write-off Car Insurance If You Use Your Car for Business and Pleasure
If your car is used for both personal and business uses, you may deduct your insurance costs from your taxes, up to the percentage you use your car for business. If half the time you use your car is for business, then you may deduct 50% of the yearly insurance costs on your taxes. People who don't use a car for business, but may occasionally need to drive somewhere for their employer can also take advantage of this tax break. For example, if your boss asks you to attend a meeting somewhere that requires you to drive to the location, the cost of insurance for the time of the business trip is deductible. It will not be deductible however if your employer reimburses you for the insurance.
Airbnb Owners and Renters
If you operate an Airbnb or rent a home, any travel related expenses to maintain the home are tax deductible. So if you drive to the house for the purpose of upkeep, cleaning, etc. you are allowed to write off the insurance. Be mindful however if you only do this once and a while, the deduction will not likely be high since it will ultimately be a small part of your total driving throughout the year. This is a great tax deduction to take advantage of however if you fly to your rented out home and can write off the cost of airfare.
Uber and Lyft Drivers
If you drive for a rideshare company, you need to have insurance, and for the time you use it as taxi, your auto insurance is deductible. The best way to calculate your deductible time is to start with your monthly car insurance payment, then divide it by the percent of time you use the car for Uber. The percent you use the car for ridesharing is the time you activate your app divided by the total time you drive the car. So if you drive two hours every day getting groceries, picking up kids, etc., and then drive three hours for Uber at night, you can say you use your car 60% of the time for ridesharing (3 Uber hours/5 total hours per day). So if your monthly premium is $128 (the average), then you can deduct $76.80 per month or $921.60 per year. It may not be as straightforward as that though, which is why it is incredibly important to keep good records.
Make Sure You Keep Good Records for Taxes
If you qualify to have your car insurance tax deductible, then you need to make an effort to keep good records. In reality, an Uber driver may drive five hours one day, one hour another, and seven another day. If you drive sporadically for your business, knowing how much you drove during the year will be even hard to figure out come tax season. Now that you know you can deduct your car insurance though, start record keeping every January. Write down every time you were driving on the clock, and also have a good estimate of all the times you were off the clock. When you do file your taxes, you will want to keep these records for at least three years. Should the IRS ever ask you to justify your write-offs, you will be able to show your records.
How to Deduct Your Car Insurance on Your Tax Form
If you are self-employed (including ridesharing) you will need to file a Schedule-C form which will have a section to include your insurance expenses to deduct. If your business driving was for an employer that you receive a W2 from, you will need to fill out a 2106 Employee Business Expenses form--assuming your company did not already reimburse you for the costs. Below you may see where on the Schedule C you can fill in your car insurance expenses info.
Remember to Consult Your Accountant if There is Any Confusion
You want to be sure you do your taxes correct the first time. If anything still confuses you about deducting your auto insurance, consult an accountant or someone versed in tax law. If you are going through services like TurboTax or TaxSlayer, they have on-call customer service with trained CPAs ready to answer your questions. If you use your own personal accountant, be sure to consult with them.