Is car insurance tax deductible?

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If you are self-employed, are an independent contractor or if you use your vehicle for any business purposes beyond commuting to and from work, your car insurance premium is likely tax deductible. However, if you use your car for both personal and professional reasons, only the portion of expenses associated with business use are tax deductible and must be prorated accordingly.

Tax Deductible Premiums: Examples

Those who receive non-employee compensation are required to submit a 1099 form to the IRS. If you receive income as a business owner or as an independent contractor, you’re receiving non-employee compensation and may be eligible for a tax deduction on your auto insurance. Likewise, if you are a full-time, salaried employee and use your car for work, you may also be eligible for auto expense-related tax deductions. Let’s look at three different scenarios in which deducting a portion of your insurance premium would be applicable:

Business Owner – You’re the sole proprietor of a home remodeling business. 60% of the total miles you drive are spent traveling to and from clients’ homes and back and forth between materials suppliers. Thus, 60% of your auto insurance premium payments will be tax deductible.1

Contractor or Freelancer – You’re a freelance photographer and drive 15,000 miles a year, 7,500 miles of which you spend traveling to and from assignments or scouting locations. In this scenario, 50% of your auto insurance premium is tax deductible.2

Standard vs. Itemized Deductions

You can choose to deduct driving-related work expenses by using either the standard per-mile deduction rate (for 2023, the rate was 65.5 cents per mile) or you can calculate the total cost of your actual expenses.

The standard rate makes calculating expenses simple for self-employed taxpayers. The typical costs of fuel, insurance, depreciation, repairs, tolls, parking fees, licenses and other vehicle expenses are factored into the calculation of this rate. Many Americans who frequently use their vehicles for business purposes elect to use this standard mileage deduction.

Drivers who use relatively expensive vehicles for business purposes may be better off electing to deduct their actual expenses. For example, if you own a 1-ton diesel pickup truck and use it for business-related winter activities such as snow-plowing, you may determine that the per-mile cost of operating this truck is much more than the average vehicle and therefore more than the standard per-mile rate. However, if you choose to itemize your actual deductions, be sure to keep track of your mileage, as well as comprehensive records of all auto-related expenses.

Use the Most Advantageous Option

The IRS encourages taxpayers to calculate their deductions using both methods. The IRS website says: “If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction.”

Non-Eligible Expenses

You can only deduct expenses for which your employer does not already reimburse you. If you have a home office, you can deduct all work travel during the day except your first and last rides to and from home. These trips are considered your “commute,” and expenses related to your regular commute to and from work are not tax deductible.

You may also wonder whether or not the premiums you pay for the medical expense portion of your policy can be used as a medical deduction; they cannot.

Not All Vehicles Qualify

The IRS defines a vehicle for the purposes of work-related driving as a four-wheeled vehicle designed for use on public roads. This eliminates motorbikes, scooters and bicycles. The IRS also specifically excludes certain specialty vehicles like taxis, moving vans and ambulances. Vehicles that weigh over 6,000 pounds are also excluded.

For more detailed information, talk to your local tax specialist and give us a call at (800) 258-5101 to find the auto insurance policy that best fits your personal and professional driving needs. You can also find us on the web at AnswerFinancial.com.

Who is Answer Financial?

As one of the nation’s largest and most reputable auto & home insurance agencies, Answer Financial has insured nearly 5 million homes and vehicles. We work with 40+ top-rated carriers to save our customers an average of $565 a year on insurance.

On our mobile-friendly website, shoppers can quickly compare rates and customize coverages from multiple home insurers. By simply entering your zip code and home address, Answer can search publicly available records like square footage and year built to deliver side-by-side comparison quotes from reputable insurance companies.

Answer Financial can help you compare, buy and often save the smart way on insurance. So before you shop, remember to rely on your insurance experts to find you the right home insurance plan for your needs and budget.

Sources:

  1. Drivers Note, “Self-Employed Mileage Deductions Rules,” https://www.driversnote.com/irs-mileage-guide/self-employed-deductions
  2. Forbest Advisor, “9 Best Tax Deductions For Freelancers To Claim,” https://www.forbes.com/advisor/taxes/best-tax-deductions-for-freelancers/
  3. IRS, “IRS issues standard mileage rates for 2023; business use increases 3 cents per mile,” https://www.irs.gov/newsroom/irs-issues-standard-mileage-rates-for-2023-business-use-increases-3-cents-per-mile
*Results of a national survey of new Answer Financial customers reporting insurance savings 2023.

1 Comment

  1. Ann Falco on October 20, 2016 at 12:14 pm

    As the owner of a towing company it is not advantageous for me to claim the standard per-mile deduction due to increased costs of fuel, insurance, and licenses. I advise keeping accurate records of mileage and submitting it to your tax professional for their evaluation of the best process. Keep in mind that the standard per-mile rate is evaluated based on the economy and your geographical location.