Who can write off car insurance?
Car insurance costs can add up quickly, so the idea of including car insurance premiums among your tax deductions is probably pretty attractive. Here are a few good candidates for writing off car insurance.
You own a car that’s used exclusively for business purposes
Say you own a small moving company. In most cases, your large truck is your small business’s heart and soul, making it possible for you to get clients’ belongings to and from their properties. In that case, your moving truck is used exclusively for business purposes, which means its car insurance expenses are fully tax-deductible. The same might apply to a contractor who uses a truck to transport supplies from job to job.
In many cases, these large commercial vehicles are expensive to insure, so deducting these costs can be quite helpful during tax season. Additional vehicle expenses can also be written off, such as maintenance and gas. That’s why, as a self-employed individual, it’s important to keep comprehensive records of your car-related expenses. That way, you can easily draw up an itemized deduction when tax season rolls around.
You’re an Uber or Lyft driver
As a driver for a rideshare company, you use your personal car as a taxi to make money. This again means that your vehicle is being used for business purposes. Whenever you’re using your vehicle to drive customers around, any vehicle-related expenses can be deducted. For instance, if you pay a car toll while driving a customer, you can write this off.
If you’re driving for Uber or Lyft, you’ll probably want to look into special rideshare car insurance. Most major car insurance companies offer such a plan, and these policies are designed specifically to meet the unique needs of rideshare drivers.
You own a car that’s used both for personal and business use
As an Uber driver, you might use your car as a taxi for a few hours a day, then use it for personal use the rest of the time. In this case, you might have roughly a 50/50 breakdown in terms of personal versus business use. In this case, come tax time, you can deduct about half of your car expenses. Once again, keeping close tabs on your costs is an excellent way to make sure you’re accurately calculating actual expenses and know how much can be deducted.
Maybe you aren’t self-employed, but your employer asks you to use your car for a business task from time to time. For instance, you might have to use your vehicle for business trips or to pick up supplies for a work event. Assuming your employer hasn’t agreed to reimburse your car expenses that go along with this task (e.g., gas), these employee business expenses are also tax-deductible.
Other groups that can write off car insurance
Self-employed professionals and small business owners aren’t the only people whose car insurance premiums are tax-deductible. If you’re an armed forces reservist and need to travel over 100 miles away from home, these travel expenses can be deducted. Additionally, certain eligible performing artists and local officials can also deduct car insurance costs. In short, make sure you do your research and speak with your accountant if you think you might be able to write off your auto insurance premiums.
What about your commute?
The bulk of your driving probably happens on your commute. Most of your insurance costs and fuel costs go toward funding these commutes, which are about 30 minutes of driving on average. Unfortunately, these commutes are still seen as personal use in the eyes of the IRS. Although the prospect of deducting these travel expenses is enticing, it’s just not realistic.
Other Car Costs You Can Write Off
When it comes to the actual cost of owning a car, you have to deal with much more than just car insurance. If you’re in a city, you likely deal with parking fees on an almost daily basis. If these fees are unreimbursed by your employer, you might be able to write them off. And if you’re self-employed and need to pay to park your commercial vehicle, you again can deduct these expenses.
If your car is damaged in a major disaster, such as a hurricane or a wildfire, you can write off the financial loss from this event on your tax return. Keep in mind that these property losses must occur within a federally-determined disaster area. For instance, the area in Hurricane Harvey’s path was mandated a disaster area by the federal government. These are the rare situations where you can write off your deductible.
How to Deduct Car Insurance from Taxes
Now that you know the situations when car insurance is tax-exempt, it’s time to start actually writing off these car insurance premiums. Here are the simple steps you can take to deduct these expenses from your taxes successfully.
Keep careful records all year
When you go to write off your car insurance expenses, the IRS will inevitably ask for your records to verify your actual vehicle expenses and gain a better understanding of how these expenses were related to business use. So if you’re an Uber driver, for instance, you’ll want to keep careful track of how many hours you used your car in a rideshare context. Much of this is logged in the Uber app, which should hopefully make record-keeping easier.
Meanwhile, if you only use your car occasionally to run errands for your employer or drive to business conferences, keeping track of just how often you use your vehicle for business travel is trickier. Try your best to take note of any situations where your car is being used for business and keep this record in a safe, easily accessible place so that you can refer to it during tax season.
Figure out which tax form you need to use
Filling out a tax form is no one’s idea of a good time. But if you’re filling out information that could lead to some solid tax deductions, the process becomes a bit more fun.
The form you fill out depends on your tax status. For instance, if you’re self-employed, you probably fill out a Schedule C form. On Part II of the form, you’ll see a grid where you can fill out various expenses. One box on this grid will be where you enter the dollar amount related to your car insurance expenses. Remember that the total amount of these expenses must exceed the standard deduction for you to write off insurance expenses. The standard deduction is determined by your age, filing status, and income.
If you work for an employer who provides you with a Form W-2, you’ll need to fill out a Form 2106, Employee Business Expenses, to deduct driving expenses for that tax year. Again, there will be a dedicated area on the form for you to report expenses. Keep in mind that you can only write off unreimbursed expenses.
To determine your business mileage versus your personal mileage, you have two options. You can either use the standard mileage rate method or the actual expense method. You might be eligible for both methods and can calculate your deductible expenses with either method then opt for the one that nets you more savings. The standard mileage rate changes each year and is set at 57.5 cents per mile for businesses in 2020.
Consult a tax expert if you have questions
If you are having trouble figuring out exactly how to deduct these car insurance costs, don’t hesitate to reach out to a tax professional. These tax experts can connect you with the right resources and information to make the most of your eligible deductions.