Is Car Insurance Tax Deductible?
"If you use your car only for business purposes, you may deduct its entire cost of ownership and operation.... However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use," according to the Internal Revenue Service.
So, is car insurance tax deductible? Yes, if your vehicle is used for business. This article will tell you everything you need to know about vehicle-related tax deductions, including how to write off your auto insurance coverage on your tax return.
Why Is Car Insurance Tax Deductible?
"The cost of ownership and operation," as the IRS puts it, includes the cost of car insurance. However, as noted above, the amount of your car insurance deduction must correspond to how much or how little your vehicle is used for actual "business purposes."
Other Groups 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 a reservist with the U.S. armed forces and need to travel more than 100 miles away from home, these travel expenses can be deducted.
Further, some performing artists and local officials are allowed to deduct car insurance costs. In short, make sure you do your research and speak with a tax pro if you think you might be able to write off your auto insurance premium.
When Isn't Car Insurance Tax Deductible?
Your car insurance is never tax deductible if you never use your vehicle for any business purpose.
However, you can still lower your auto insurance premium, so look at different car insurance companies and compare prices and policies to get the lowest-priced coverage. The insurance industry is a competitive marketplace—they want your business!
Other Tax-Deductible, Vehicle-Related Business Expenses
If your car is used for business purposes, you can write-off your car insurance as well as the following expenses:
- Sales tax
- Car payments
- Loan interest
- Registration fees
- Licensing fees
- Garaging fees
- Vehicle depreciation
- Oil changes
- New tires
- General maintenance
- Parking fees
- Vehicle-related expenses for business travel
- Rental car expenses, including insurance, for a business trip
- Driver education expenses
You get the idea. Can you imagine how much money you'd save if you were able to claim every tax break on this list? Taken together, these "tax cuts" can seriously lower how much the IRS can tax your self-employment income.
If you use your vehicle 100% of the time for business, you can claim the full amount of these business-related expenditures. However, if your car is for both personal and business use, you can only claim the driving expenses that are related to your business.
Car-Related Tax Deductions that Apply to Any Car
No matter what purpose your car is driven for, you can get a tax deduction from the IRS for three events:
When your vehicle is stolen
When your vehicle is totaled
When your vehicle is donated to a charitable organization
If you scroll down, you'll find a section devoted to each of these three topics. If you keep reading, the next several sections will delve into how to deduct car insurance on your tax returns.
Wait, Is My Business Really a Business?
Even though you're using your car to make money, you may be unsure whether the Internal Revenue Service would consider your money-making venture to be an actual business. According to the IRS, a taxable business is defined by two conditions:
Income or profit is your "primary purpose for engaging in the activity."
You engage in that activity with "continuity and regularity."
If your money-making venture meets these criteria, you must report your "income or profit" to the IRS. The good news? If your business depends on your vehicle to do business, you can write off your car insurance expenses and any other vehicle-related costs you may have.
Is Buying a Car Tax Deductible?
Unless you are the company owner and bought a car solely for business use, you will not be able to deduct the entire price of the car but only a portion. Most states do allow you to deduct the sales tax if you use the car for personal use. In order to be qualified for deductions, your car must primarily be used for business purposes, which excludes commuting to and from work. However, if you drive from the office to a client's office, that counts as business usage.
Can I Deduct the Sales Tax on My New Car?
Whether you purchase a new or used vehicle, you can deduct the sales tax using Form 1040's Schedule A form. Note: To deduct the sales tax, you must use the actual expense method.
If you live in a state that imposes income tax and sales tax, choose which you want to deduct. Also, if your state imposes a higher tax rate on vehicles, you can only deduct the "general rate." For instance, if your state imposes a 7% sales tax on cars but the general sales tax is 6%, you can only deduct the 6% of your car's sales tax. To do this properly, you'll need to show proof of the sales tax with a copy of the purchase agreement that you signed at the dealership.
Is Driving to Work a Legit "Business Use"?
Using your car to get to work is not an IRS-recognized business use.
If your vehicle is only used for commuting, your sole proprietorship cannot write off car-insurance expenses or any other car-related costs.
Is Auto Insurance Tax Deductible?
If you own a sole proprietorship and want to deduct your car insurance and any other car-related expenses, you must file Form 1040's Schedule C with the IRS. All federal tax forms can be downloaded from the IRS website and printed out.
This tax form allows you to "report income or loss from a business you operated or a profession you practiced as a sole proprietor" during the previous tax year, notes the IRS. Of course, this "loss" includes your car insurance and any other business-vehicle expenses.
How Do I Claim My Vehicle's Business Use If I'm Not Self-Employed?
If your employer issues you a W-2 employment tax form, you will need to file Form 2106 to claim any expenses related to the business use of your personal car. Remember, you can only claim unreimbursed expenses.
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How Do I Calculate My Vehicle Deductions?
There are two ways to calculate your vehicle-related tax deductions: You can use either the "standard mileage rate" method or the "actual expense" method. Note: You can use one method or the other in the same tax year but not both.
Standard Mileage Method
If you use the standard mileage method, all you have to do is keep track of your mileage for the tax year. As of 2020, your business can claim up to 57.5 cents per mile, and this standard mileage rate takes into account insurance coverage, fuel, maintenance and other costs.
To calculate your deduction, add up the total dollar amount represented by your business miles, then multiply that sum by the percentage of your vehicle's business use.
Actual Expense Method
If you use the actual expense method, you must "determine what it actually costs to operate the car for the portion of the overall use of the car that's business use," according to the IRS. Unlike the standard mileage method, this method depends upon itemized deductions, which means you have to provide documentation for all your actual vehicle expenses.
To calculate your deduction, add up the total dollar amount of your car-related expenditures, then multiply that sum by the percentage of your vehicle's business use.
Standard Deduction vs. Business Expenses
Your standard deduction is based on your age, your income and your filing status, and this deduction applies to every one of your tax returns.
It is important to note that, as a self-employed taxpayer, you cannot write off your business-related vehicle expenses if the total dollar amount is less than your standard deduction.
When tax season rolls around, you might want to consult a tax professional. For instance, your tax professional can advise you whether standard mileage method or the actual expense method will save you more money. Tax experts charge tax preparation fees—another business expense!—but they know all the loopholes to save you money.
Keep Accurate Records for Your Tax Returns
If are using the actual expense method, you must document every single one of your itemized deductions, including your auto-related deductions. If you are subject to a tax audit, the IRS will want to see this documentation.
So, it is extremely important to organize, store and preserve all your receipts and every scrap of paperwork to back up every one of your claims. The better your sole proprietorship keeps track of its vehicle expenses, the better the tax break.
If you're a rideshare driver, consider getting an accordion file to keep track of all your car-related expenses. Having an accordion file is like having a home office right in your car.
How To Keep Track of Business Miles Driven
The Internal Revenue Service requires you to keep a log of your vehicle's "business miles." Your mileage log must include the following information:
- Date of vehicle use
- Purpose of business trip
- Odometer reading at the start
- Odometer reading at the end
- Total miles driven
You have to document this information at the time of the trip or very close to the time of the trip—this is what the IRS means by "contemporaneous" mileage record-keeping.
You can keep always keep your log in a dedicated notebook, but you might want to check out MileIQ, TripLog or another mile-tracking app. If you are a rideshare driver, your business miles are automatically tracked and recorded by your company's rideshare app.
Tax Deductible Items for Rideshare Drivers
If you drive for Lyft, Uber or another rideshare service, the IRS considers you to be one of those brave, bold self-employed individuals. Since you're running a sole proprietorship as a rideshare driver, you can claim your car insurance deductible as well as all the expenses listed in the previous section. But there are some rideshare-related tax deductions you might not have considered:
- Cell-phone service
- Food and drink for passengers
- New floor mats
- Car stereo system
If you use your cell phone to conduct your rideshare business, you can write off the expense of your cell service. The other items on the list can be claimed as deductions because they enhance your business and your customers' experience.
Are Tickets Tax Deductible?
Tickets for parking and moving violations cannot be claimed on your tax return. This crazy, mixed-up world often seems to reward bad behavior, but not this time.
Can I Write Off My Lease Payments?
Yes, you can. If your auto lease is $300 a month but you only use the car for business 50% of the time, you can claim an $1,800 deduction (12 months x $150=$1,800). If the vehicle is used 100% for business, you can claim a 100% deduction.
Can I Write Off the Interest on My Car Loan?
According to the IRS, "If you are an employee, you can't deduct any interest paid on a car loan. This applies even if you use the car 100% for business as an employee. However, if you are self-employed and use your car in your business, you can deduct that part of the interest expense that represents your business use of the car. For example, if you use your car 60% for business, you can deduct 60% of the interest on Schedule C (Form 1040). You can't deduct the part of the interest expense that represents your personal use of the car."
Is a Stolen Car Tax Deductible?
In short, yes. To get a tax deduction for your stolen car, you'll have to document your vehicle's theft with either a police report or an insurance claim. However, you can only make an insurance claim if you have comprehensive insurance, because only comprehensive insurance covers auto theft.
If your $30,000 vehicle is only worth $15,000 when it is stolen, you can only claim a $15,000 loss for tax purposes. Remember, this calculation applies to any vehicle, whether or not it's used for business purposes.
However, if your auto insurance provider reimburses you for the full value of your vehicle, you cannot claim your stolen car as a tax deduction. On the other hand, if your insurance policy provider doesn't reimburse you for your vehicle's full value, you can claim the balance as a legit tax deduction.
Is a Totaled Car Tax Deductible?
In short, yes. To get a tax deduction for your totaled car, you'll need the proper documentation to verify that your car was, in fact, totaled. While an official report from your insurance assessor or an auto body shop will do the trick, a police report will not.
Totaled cars can be covered by comprehensive, collision or the at-fault driver's property-damage liability insurance, depending on the situation. But, once again, you can only claim a tax deduction for the dollar amount of your vehicle's value that was not covered by your auto insurance policy.
The formula for determining whether a vehicle is a total loss differs by state. There are two common ways to identify a total loss:
Total Loss Threshold
A car is declared a total loss when the cost of repair is more than the state's set percentage of the car's actual cash value. Most states that use a total loss formula set the percentage between 70% and 80%.
Total Loss Formula
In states that don't set a threshold, a car insurance company might use the so-called total loss formula: If the cost of repair and salvage value is more than the actual cash value, a vehicle will be declared a total loss.
Is Donating a Car Tax Deductible?
Not all car donations are tax deductible. For instance, if you "donate" your car to your little brother, it doesn't count. You must show proof that you donated your vehicle to a valid charity or organization to be approved. These charities and organizations are called Section 501(c)(3) organizations. For an individual to be able to deduct a donation in their taxes, the deduction must be itemized on Schedule A for Form 1040. Furthermore, it cannot be greater than 50% of your adjusted gross income.
How Does the Electric-Car Tax Credit Work?
You can claim the Alternative Motor Vehicle Tax Credit if you are the original purchaser of the vehicle. In other words, if you bought it used, you can't claim anything. To qualify, your vehicle must be propelled by power from one or more cells that convert chemical energy into electricity.
There's also the Qualified Plug-in Electric Drive Motor Vehicle Tax Credit. To qualify, your vehicle must run on an electric battery that is capable of being recharged from an external source of electricity. The IRS tax credit is $2,500 to $7,500 per new electric vehicle (EV). For example, for a 2014 Honda Accord, you would be eligible for a $3,626 credit; for a 2020 BMW i8 Roadster, you would be eligible for a $5,669 credit.
Buying Affordable Car Insurance
Even if you can deduct car insurance on taxes, you still want to have the lowest insurance costs without compromising on the quality of coverage. Let SmartFinancial find you the lowest rate on the coverage you need. It only takes a couple of minutes to compare car insurance rates and save on car insurance costs. Just enter your zip code below to begin.
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