Auto Insurance: Is It Tax Deductible?

Whether or not you can deduct auto insurance from your taxes depends on how you use your car. If you are self-employed or a freelancer, you may be able to deduct at least some of your car insurance premiums as a tax deduction. If you have to drive as part of your job and don't get reimbursed by your employer, you may also be able to deduct some of your car insurance expenses. However, your normal commute does not count as a business expense. If your car is used purely for personal reasons, you cannot deduct your car insurance from your taxes.

Self-employed people can deduct car insurance

There are two ways to calculate business vehicle expenses: the standard mileage rate or the actual expense method. The standard mileage rate for 2023 was $0.655 per mile, and 0.67 per mile for 2024. Using the standard mileage rate, you cannot deduct auto insurance premiums as a separate expense, but you can still deduct tolls and parking fees. With the actual expense method, you can deduct the actual cost of auto insurance, as well as other expenses such as repairs, maintenance, and fuel.

For example, if a self-employed person drives their car 30% of the time for business and 70% for personal use, they can deduct up to 30% of their eligible vehicle expenses. These expenses can be reported on a Schedule C tax form.

It is important to keep accurate records of business mileage and expenses for tax purposes.

Armed forces reservists can deduct insurance

Reservists can deduct additional employee business expenses only if they itemize deductions on Schedule A (rather than take the standard deduction). Itemizing is generally a better option if you have enough deductions to exceed the standard deduction for your filing status.

Reservists called to active duty may receive military differential pay from their employer to represent the difference between their regular salary, prior to being called to active duty, and the amount being paid by the military. Military differential pay is voluntary by an employer and has special rules. For example, the pay is not considered wages and therefore is not subject to Social Security, Medicare, or income tax withholding. The income should be reported on Form 1099-MISC (Box 3) and on Form 1040 (Line 21) as "other income" when filing a tax return. Additionally, this pay will not qualify for the combat pay exclusion. Even though this income is not subject to any withholding, it is still considered taxable.

Another benefit for reservists called to active duty is that they may qualify for a deferral of taxes owed if they can show that their ability to pay taxes was affected by their military service. The deferral is not automatic; they will need to apply for it. When applying, they must show how their military service impacted their ability to pay. They must have received a notice of tax due, or have an installment agreement with the IRS before applying for the deferral. The deferral does not extend deadlines for filing any tax returns.

Qualified performing artists can deduct insurance

Car insurance is tax-deductible for certain individuals. Generally, people who are self-employed can deduct car insurance costs. However, there are other specific groups for whom car insurance is tax-deductible, including qualified performing artists.

Who is a Qualified Performing Artist?

To be considered a Qualified Performing Artist (QPA), an individual must meet the following criteria:

• The artist must have worked as a performing artist as an employee (not an independent contractor) for at least two employers.
• The expenses attributed to their work as a performing artist must exceed 10% of their gross income from such services.
• The artist's adjusted gross income (AGI), excluding this deduction, must not exceed $16,000.
• The two employers must each pay the artist wages of at least $200.

A QPA can deduct all "ordinary and necessary expenses" from their AGI. This includes supplies, insurance (other than health insurance), travel expenses, depreciation, car expenses, and equipment rentals. These expenses must be attributable to the artist's work as a performing artist. If they are also attributable to personal use or work as an independent contractor, the expense amounts must be prorated accordingly.

Benefits of the QPA deduction

The QPA deduction is an "above-the-line" deduction, meaning it reduces a taxpayer's AGI. A lower AGI increases eligibility for tax credits and other tax deductions, while also reducing taxable income.

Business owners can deduct insurance as a business expense

As a business owner, you can deduct the cost of insurance as a business expense, as long as it is for your trade, business, or profession. This is true for both small and large businesses. The IRS considers insurance to be an "ordinary and necessary" cost for businesses.

There are several types of business insurance that are tax-deductible, including:

• Commercial property insurance
• Data breach insurance
• Professional liability insurance
• General liability insurance
• Workers' compensation insurance
• Business income insurance or business interruption insurance
• Health insurance
• Life insurance
• Car insurance
• Commercial surety bonds
• Builder's risk insurance or construction bonds
• State unemployment benefit contributions
• Performance bonds or fidelity bonds
• Home insurance
• Credit insurance
• Overhead insurance
• Group hospitalization and medical insurance for employees

It's important to note that there are some types of insurance that cannot be deducted as a business expense. These include:

• Prepaid insurance expenses
• Disability insurance
• Life insurance coverage if you are a direct or indirect beneficiary of the policy
• Interest on loans with respect to life insurance policies
• Insurance you get to secure a loan
• Interest allocated to unborrowed policy cash value
• Self-insurance reserve funds
• Dividends from business insurance

The process for deducting insurance expenses will depend on the structure of your business. For example, sole proprietors can take a deduction on their personal income tax, while partnerships need to report the amount of insurance premiums on each partner's K-1. It's always a good idea to consult with a tax professional to ensure you are taking advantage of all the deductions you are entitled to.

You can't deduct insurance if your employer reimburses you

If your employer reimburses you for your auto insurance, you cannot deduct the cost of your insurance from your taxes. This is because, in order to deduct the cost of your insurance, the reimbursement must be taxable. If your employer reimburses you for the cost, this is considered to be the same as taking a deduction without having to report it on your return.

There are certain circumstances in which you can deduct the cost of your auto insurance. If you are self-employed and use your car exclusively for business, you may be able to deduct certain car expenses, including your insurance premium. If you use your car for both business and personal reasons, only the portion used for business reasons is tax-deductible. You can't claim your commute to and from work, but there are deductions available for work-related driving duties like visiting clients or picking up work supplies.

If you are an armed forces reservist travelling up to 100 miles away from your home, a qualified performing artist, or a fee-basis state or local government official, you may also be able to deduct the cost of your auto insurance.

Frequently asked questions