Can I deduct car insurance?

December 30, 2019 by Steve Banner, EA, MBA
car, money, and calculator on financial sheet

The good news is that you can indeed deduct your car insurance from income when preparing your taxes – but the bad news is that you must first meet certain conditions.

The first condition is that you must be eligible to claim expenses for the business use of your car.

The rules in the area of claiming car expenses such as insurance changed at the beginning of 2018. As a result, most employees who drive their own car for work purposes and are not repaid for their costs cannot deduct their car expenses. From 2018 until 2025, only Armed Forces reservists, qualified performing artists, and some government officials can claim their job-related car expenses.

But the above rule changes only affect employees, which means that if you are self-employed, you can continue to deduct your work-related car expenses just as you always have.

The second condition is that you must use the “actual expense” method to claim your expenses rather than the “standard mileage rate” method of 58 cents per mile for 2019 (or 54.5 cents for 2018). The standard rate is meant to cover your insurance as well as costs such as gas, oil, and repairs.

But if you use the actual expenses method, you must keep records of all of your car-related expenses for the year – including insurance. You must also calculate the percentage of miles you drove for the year that were related to business. You can then deduct the amount of your actual expenses multiplied by the percentage of the car’s use for business.

At this point, it would be wise to compare the available deduction from the actual method against the amount available from the standard method. If you used the standard rate for the first year the car was used for business, you can choose to use either standard or actual in each of the following years. But if you used the actual method in the first year, you must always use the actual method in each year that follows.

Finally, it is important for anyone who thinks they may meet any of the above conditions to make sure to keep accurate and contemporaneous mileage logs as well as receipts for their car expenses. This is a frequently audited deduction, and without good documentation, the amount claimed will not likely be allowed.

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Steve Banner, EA, MBA
Tax Content Developer

 

Steve Banner began his career in the field of income tax in 1977 and has since gathered business experience in a variety of countries and cultures. In addition to the United States, he has lived and worked for extended periods in Australia, Saudi Arabia, Canada, and Sweden. Along the way he studied Adult Education and earned a Bachelor of Education, Master of Educational Administration, and MBA. He joined TaxAudit in 2016, where he is a Tax Content Developer.


 

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