Auto Insurance Tax Deductions: What You Need To Know

Car insurance can be claimed as a tax deduction in specific circumstances. Generally, you need to use your vehicle for business-related reasons to deduct part of your car insurance premiums as a business expense. Self-employed individuals who use their car for business purposes frequently deduct their car insurance premiums. However, car insurance used for personal vehicles is typically not tax-deductible.

Self-employed people and business owners

If you use your vehicle for both business and personal use, you can only deduct your insurance from your taxes for the percentage of time you use your car for business. So, if you use your car for business half the time, you can deduct 50% of the yearly auto insurance costs from your taxes.

There are two methods for calculating your deduction: the Actual Expenses method and the Standard Mileage method. The first allows you to deduct all your business-related vehicle expenses, including your car insurance premiums. The second allows you to deduct an amount based on the actual miles you drove for business using a cents-per-mile rate. You can choose either method and change from year to year without penalty.

If you are self-employed, you will file a Schedule C tax form, which includes a section for your deductible insurance expenses. If you work for an employer but still use your own vehicle for business, you can fill out Form 2106.

It's important to note that commuting to and from work generally doesn't count as a business expense, and you can't write off your car insurance if your business or employer reimburses you.

Armed forces reservists

To report these expenses, armed forces reservists should first complete Form 2106, Employee Business Expenses. On Schedule 1 (Form 1040), line 12, they should enter the part of their expenses, up to the federal rate, included on Form 2106, line 10, that is for reserve-related travel more than 100 miles from their home.

In addition to the above, armed forces reservists may also be able to deduct car insurance as part of their expenses. This is because reservists are considered self-employed and can deduct car insurance as part of the "actual car expenses" method. This method also includes deductible car repairs, lease payments (subject to the lease inclusion amount), registration fees and licenses, tolls and parking fees.

Qualified performing artists

For qualified performing artists, car insurance premiums may be tax-deductible. This is because performing artists are eligible to deduct expenses incurred in the course of their employment. This includes car expenses, such as insurance, repairs, registration fees, and licenses.

To be considered a qualified performing artist, an individual must meet certain criteria: they must have worked as a performing artist for at least two employers in the capacity of an employee (rather than an independent contractor); the expenses attributed to rendering services as a performing artist must exceed 10% of the individual's gross income from such services; and the adjusted gross income of the individual must not exceed $16,000 (or $29,200 for married couples filing jointly in 2024).

It is important to note that the criteria for being a qualified performing artist also include a requirement that the individual be paid at least $200 by each of the two employers for their services as a performing artist within a given tax year.

If you are a qualified performing artist, you can deduct your car insurance premiums by filing IRS Form 2106. This form is used to list relevant expenses, including car insurance, repairs, and other vehicle-related costs.

In addition to the standard deductions available to all taxpayers, qualified performing artists may also be able to claim other tax perks, such as deductions for buying an electric or hybrid vehicle, donating an old car to charity, or using their car primarily for medical reasons.

Consulting a tax professional can help clarify which deductions you are eligible for and provide guidance on how to maximize your tax benefits.

Fee-based government officials

For fee-based government officials, car insurance is a tax-deductible expense. This applies to state or local government officials who are compensated on a fee basis and are not reimbursed for their expenses.

To deduct car insurance from your taxes, you must use your vehicle for business-related purposes, and the amount you can deduct depends on the percentage of business-related usage. If you use your car for both personal and business purposes, you must divide the expenses accordingly. For example, if 70% of your mileage is for business, you can apply a deduction to 70% of your expenses.

There are two methods for calculating car-related business expenses: the actual expenses method and the standard mileage method. The actual expenses method involves tallying all business-related costs, including car insurance, repairs, lease payments, registration fees, and licenses. The standard mileage method, on the other hand, allows you to deduct a set rate per mile driven for business; in 2024, this rate is 67 cents per mile.

As a fee-based government official, you would file IRS Form 2106 to write off your car insurance and other vehicle expenses. It is important to note that commuting to and from work does not count as a business-related purpose.

Actual expenses vs standard mileage rate

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 actually 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 and half are for personal use, 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)
• Cost of the car
• Lease payments

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 best way to do this is with a mileage log.

For 2023, the rate is 65.5 cents per mile. For 2024, the rate is 67 cents per mile.

Each method has its advantages and disadvantages, and they often produce vastly different results. Actual expenses might produce a larger tax deduction one year, and the standard mileage rate might produce a larger deduction the next.

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