Can You Deduct Car Insurance Premiums from Your Taxes?

Looking for opportunities to maximize deductions and minimize your tax burden? Then, you may be wondering if car insurance is tax deductible.

The straightforward answer would be no if your vehicle is used for personal reasons. However, there are some exceptions.

In this article, we explain what you need to know about deducting car premiums from your taxes. While this method won’t directly help you save on insurance, it can help reduce your overall tax liability if you qualify.

Is Car Insurance Tax Deductible?

Car insurance is only tax deductible if it is a business expense. For most people, that means it is not deductible from their personal taxes. However, those who use their vehicles for business may qualify for a tax deduction.

The IRS allows you to deduct all “ordinary” and “necessary” expenses that are directly tied to business activities and earning revenue. Ordinary expenses are those considered common and accepted in your trade or business, while necessary ones are helpful and appropriate.

Is Auto Insurance Tax Deductible for the Self-Employed?

Yes, car insurance is tax deductible for the self-employed. If your vehicle is solely used for business, you are eligible to deduct the entire car insurance cost. This scenario is pretty straightforward and offers the maximum tax relief.

However, if you use the same vehicle for both personal and business purposes, you can deduct only a part of the car insurance that is proportional to how much you use the car for business purposes.

You can be considered self-employed if you own your business or work as a freelancer or contractor. If you are a full-time employee receiving a W-2 form from a company, then you are likely not self-employed.

Driving activities that are usually considered business-related for self-employed people include, but are not limited to:

• Commuting to clients or potential customers for consultations or meetings
• Driving to job sites for work-related tasks, particularly common in construction, landscaping, or real estate
• Transporting goods and supplies to customers
• Traveling to purchase or pick up supplies needed for your operations
• Driving to classes, seminars, or training sessions relating directly to your business
• Using your vehicle for ridesharing for companies like Uber or Lyft

How to Write Off Car Insurance from Taxes

If you qualify as self-employed, deducting car insurance can be a beneficial way to reduce your taxable income. For that, you need to follow the following steps to ensure you’re doing everything right:

Step 1: Determine if Vehicle Use Qualifies as Business-Related

Before you consider deducting car insurance or other vehicle expenses, establish that the use of your vehicle meets the IRS criteria of being both ordinary and necessary for your business.

As mentioned above, ordinary business use of a car includes one that is common and accepted in the trade or industry. An example would include driving a contracting van to a client’s home to conduct home renovations. This is a common practice for getting contractors and their tools to the work site.

A necessary business use of a car is one that is helpful or appropriate for work-related activities. Building off the previous example, driving a contracting van to a client’s home is definitely useful to efficiently get the contractor to the location, including all their tools, equipment, and materials. Without the van, the contractor would have significant difficulties in completing their work in a timely manner.

These definitions are fairly broad, and most self-employed individuals can show that their business activities fit both criteria. If you use your car to carry out any business or revenue-generating activity, you will likely qualify for a tax deduction on your insurance.

However, if in doubt, it’s always best to consult a tax professional rather than risk an audit.

Step 2: Determine the Business Use of the Vehicle

Once you determine that your vehicle use fits the ordinary and necessary criteria, you then have to determine how often you use the vehicle for business purposes. Of course, if your car is only used for business reasons, then this would be 100% of the time, and you would be able to deduct your entire car insurance premium.

However, if you have a dual-purpose car, you’ll need to track and calculate how much time is spent using the car for business vs. personal reasons. For instance, if you drive 60% of the time for business, such as visiting clients or making deliveries, you can deduct the corresponding 60% of the car insurance expense from your tax return.

The best way to calculate is to keep a log each time you use the car that shows how long you used the car, for what reason, and for how many miles. Several apps like Zoho Expense and Rydoo can help you track your mileage each time you drive for your work.

Keep in mind that you can claim more than just your insurance premiums. If you use your car for business purposes, you can also deduct gas, maintenance, and repair costs. Make sure to keep a record of all receipts and invoices.

Step 3: Choose Your Deduction Method

You can deduct car insurance from your taxes using two methods. The first one is the Standard Mileage Rate, which is the most straightforward and easiest to calculate.

With this method, you multiply the IRS standard mileage rate for the year by the total number of business miles driven. This rate is calculated to theoretically cover all costs of operating your vehicle, such as fuel, maintenance, insurance, and depreciation.

For 2024, the IRS Standard Mileage Rate is 67 cents per mile. So, if you drove 3,000 miles for business purposes in 2024, the deductible amount would be:

$0.67 x $3,000 = $2,010

The second option is the Actual Expense Method, which requires detailed record-keeping of all costs but can yield a larger deduction if your actual expenses are high and most of your miles driven are for business purposes. It involves adding all the vehicle expenses for the year and multiplying by the percentage of the vehicle’s use that was for business.

For instance, if you calculate the total expenses, including car insurance, to be $3,000 for the year and the total mileage driven was 80%, the deductible amount would be:

$3,000 x 80% = $2,400

Choosing between these two methods depends on which one would yield a higher deduction. Therefore, we advise you to calculate your deduction using both formulas first and go with the one that results in a higher deductible amount.

Step 4: Fill Out the Application Forms

The self-employed are required to complete the vehicle expenses section on Schedule C of Form 1040. You’ll have to enter your vehicle expense deduction in Part II, where it says “Car and truck expenses.”

If using the Standard Mileage Rate option, enter the total number of miles driven for business operations in Line 44a, the standard rate of the year in Line 44b, and their multiplied rate in Line 44c. If you use the Actual Expense Rate instead, enter your vehicle expenses in Line 9.

Step 5: Submit Your Tax Return

Before submitting, thoroughly review your tax return. Check that all information is correct and that it matches your records. Keep a copy of all records, including mileage logs, receipts, and filled-out forms, as you will need to present them if the IRS requires an audit.

Final Thoughts

As we wrap our discussion on whether car insurance is deductible, we see that there are tax deductions that a self-employed individual can benefit from. These can lead to significant tax savings if you properly track and report your business-related vehicle expenses.

FAQ

If you still have some unanswered questions, check out the FAQ section below for clarification:

Is Vehicle Insurance Tax Deductible When Used for Both Personal and Business Purposes?

If you use your vehicle for both personal and business purposes, you can still write off a portion of your auto insurance. The deductible portion is based on the extent of the vehicle’s business use.

To accurately claim this deduction, you need to keep detailed records of the miles driven for business throughout the year and apply this percentage to your total vehicle expenses, including insurance.

What Vehicle Expenses Are Tax Deductible?

In addition to car insurance, self-employed individuals can also deduct other vehicle expenses that are used for business purposes. These include fuel, repairs and maintenance, vehicle registration fees, lease payments, and depreciation. Similar to car insurance premiums, you must prorate these expenses based on the percentage of the vehicle’s use for business if you're claiming for a dual-use vehicle.

Can I Deduct Parking Fees and Tolls?

Yes, parking fees and tolls are also deductible while using your car for business. These expenses are considered separately from the standard mileage rate and can be added to your deduction total.

Is Interest on a Car Loan Deductible?

If you’re self-employed and lease your vehicle for business operations, the interest on your car loan is deductible. Again, the deductible amount should be determined by proration based on the percentage used for business.

How Long Should I Keep Vehicle Expense Records?

It is advisable to keep these records for at least three years from the date of filing your tax return. Three years is generally recommended as it aligns with the IRS’s period for conducting audits.

Can W-2 Employees Deduct Car Insurance Premiums?

Most W-2 employees can not deduct car insurance premiums because of the Tax Cuts and Jobs Act of 2017. However, there are some exceptions:

• Armed Forces Reservists can deduct unreimbursed travel expenses for reserve duties
• Qualified Performing Artists can deduct expenses necessary for their performances
• Fee-based State or Local Government Officials can deduct business expenses
• Employees with Impairment-related Work Expenses can deduct car insurance premiums if the car is modified or specially equipped for their impairment

Sources

• IRS. “Here’s the 411 on who can deduct car expenses on their tax returns.” Accessed June 21, 2024.
• IRS. “Self-employed individuals tax center.” Accessed June 21, 2024.
• Investopedia. “Standard Mileage Rate Tax Deduction Overview.” Accessed June 21, 2024.
• Fyle HQ. “Ultimate Guide to Mileage Reimbursement in 2024: IRS Rates, Rules, and Best Practices.” Accessed June 21, 2024.
• Driversnote. “Claim Mileage with the Actual Expense Method.” Accessed June 21, 2024.