Mileage And Auto Insurance: Deducting Costs

If you use your car for personal reasons, you likely cannot deduct your car insurance costs on your tax return. However, if you use your car for business-related purposes, you may be able to deduct part of your insurance premium. This includes those who are self-employed and use their car for business purposes, or employees whose employer does not plan to reimburse them for car-related expenses. In addition to insurance premiums, you may also be able to deduct other auto-related costs, including gas, repairs, parking, and value depreciation, as long as these costs are directly related to business use.

Self-employed individuals can deduct car insurance

Self-employed individuals who use their car for business purposes can frequently deduct their car insurance premiums from their taxable income. This is because the IRS considers the cost of car insurance as a business expense.

There are two methods for figuring out car expenses: the Actual Expenses method and the Standard Mileage method. The former allows you to deduct all your business-related vehicle expenses, including car insurance premiums, registration fees, licenses, tolls, and parking fees. The latter allows you to deduct an amount based on the actual miles you drove for your business using a cents-per-mile rate. For example, the standard mileage rate for 2018 was 54.5 cents per mile, and for 2019, it was 58 cents.

If you use your car for both business and personal purposes, you will need to split the expenses. The deduction is based on the portion of mileage used for business. For example, if 70% of the miles you drive are for business, you can apply for a deduction for 70% of your expenses.

To file your taxes, self-employed individuals will need to fill out the Schedule C form, which can be found on the IRS website. It's important to note that you cannot deduct the cost of commuting to and from work, as this is generally not considered a business expense.

Employees can't deduct car insurance

If you are an employee, you cannot deduct car insurance costs from your taxable income, even if your employer does not reimburse you. This rule has been in place since December 2017, when the Tax Cuts and Jobs Act suspended miscellaneous itemized deductions subject to the 2% floor.

However, there are some exceptions. Certain taxpayers may still deduct unreimbursed employee travel expenses, including Armed Forces reservists, qualified performing artists, and fee-basis state or local government officials.

If you are self-employed, you can deduct car insurance costs as a business expense. If you are using your car for business purposes, you can either claim the mileage you drive at an Internal Revenue Service (IRS)-published rate or claim actual expenses, including car insurance. The IRS mileage rate is designed to include not just the cost of fuel but also other costs inherent in operating the vehicle, including insurance, maintenance, and other related costs.

Reservists, performing artists, and government officials may be exempt

If you use your vehicle for personal reasons, you likely cannot deduct your car insurance premiums from your taxable income. However, if you use your vehicle for business-related reasons, you may be able to deduct your car insurance premiums as a business expense. This includes self-employed individuals, business owners, and rideshare drivers.

Reservists in the Armed Forces who travel up to 100 miles from home, qualified performing artists, and fee-based state or local government officials may also be exempt from certain tax requirements. These individuals may be able to deduct unreimbursed employee travel expenses, including car insurance premiums.

If you are a reservist, performing artist, or government official and use your vehicle for business purposes, you may be able to deduct your car insurance premiums. To do so, you will need to fill out Form 2106, Employee Business Expenses, to figure out the deductions for your car expenses. This form can be used to report auto insurance premiums and deductibles as a business expense.

It is important to note that commuting to and from work is generally not considered a business expense. Additionally, you must keep records of your mileage and any other relevant expenses, such as gas and repairs.

Mileage calculation for part-time business use

If you use your vehicle for part-time business purposes, you may be able to deduct your car expenses on your tax return. However, if you use your vehicle for both business and personal purposes, you must split the expenses. The deduction is based on the portion of the mileage used for business.

There are two methods for calculating car expenses: the actual expenses method and the standard mileage rate method.

Actual Expenses Method

The actual expenses method requires you to add up all the money spent on operating the vehicle for work-related travel. This includes costs stemming from maintenance, lease payments, gas, tires, insurance, licensing and registration fees, and vehicle depreciation. You then multiply that figure by the percentage of the vehicle's business use. For example, if 33% of your vehicle's use was for business purposes, you would multiply your total expenses by 0.33 to find the amount you can deduct.

Standard Mileage Rate Method

The standard mileage rate method is generally considered simpler than the actual expenses method. With this method, you track your business mileage and then multiply this number by the standard mileage rate set by the IRS each year. For example, if you drove 30,000 miles for business in 2023, you would multiply 30,000 by the 2023 standard mileage rate of 65.5 cents per mile to get a deduction of $19,650 for the year.

It is important to note that you cannot use the standard mileage rate method if you operate five or more cars at the same time, claim certain types of deductions or depreciation on the car, or use actual expenses after 1997 for a car you lease.

Regardless of the method you choose, it is essential to keep accurate records to support your business mileage deduction claim.

Actual expenses vs. standard mileage deduction

The IRS offers two ways of calculating the cost of using your vehicle for business: the Actual Expenses method and the Standard Mileage method.

Actual Expenses Method

To use the actual expenses method, add up all the money you spent operating your vehicle and multiply that figure by the percentage of the vehicle’s business use. For example, if half the miles you drive are for business, you will multiply your total vehicle expenses by 50% to arrive at the business portion. Some of the costs you can include in your actual expenses are:

• Maintenance (such as oil changes, brake pad replacements, tire rotations)
• Title, licensing, and registration fees
• Vehicle depreciation (use a depreciation table to calculate the amount, and then deduct only the portion that applies to the business use of your vehicle)

Standard Mileage Method

The standard mileage method is a much simpler way of calculating the deduction for the business use of your car. It does not require you to track individual purchases and save receipts. Instead, you simply keep track of your business and personal mileage for the tax year. As with other tax deductions, you'll need to determine the percentage of your mileage that applies to your business.

The standard mileage rate for 2023 is 65.5 cents per mile. For 2024, it will increase to 67 cents per mile.

Each method has its advantages and disadvantages, and they often produce vastly different results. You should calculate your expenses using both methods and then choose the one that gives you the largest deduction.

If you drive a lot for work, it's a good idea to keep a mileage log. Otherwise, the actual expenses deduction will save you the most.

If you choose the actual expenses method the first year you start using your car for work, you're locked into that method for the rest of the vehicle's life. If you choose the standard mileage method that first year, you can switch freely between them later on.

Frequently asked questions