Car insurance is necessary, but paying your premium is never fun. One way to lessen the pain of car insurance is to use it as a tax deduction, which is possible,but only in specific circumstances.
Here is what you know about getting a tax break on the cost of personal car insurance.
- Car insurance is only tax-deductible in certain circumstances and they are all related to using a vehicle for business purposes.
- According to the IRS, in 2024, the standard mileage rate for using vehicles for business purposes is 67 cents per mile driven for business use.
- You must keep a detailed driving log and receipts related to your business driving to deduct it from your taxes.
- Your daily commute to work is not tax-deductible but driving to client meetings may be eligible.
When is car insurance tax-deductible?
Is car insurance tax-deductible? Yes – but only in certain circumstances.
There are three main situations where car insurance might be tax-deductible, says Sarah Shannonhouse, a certified public accountant and manager for tax practice and ethics with the American Institute of CPAs — and they all relate to using your car for business purposes.
You might be able to deduct your car insurance if you are a:
- A business owner who owns and depends on using company cars or a fleet of vehicles.
- A self-employed individual who uses a vehicle exclusively for business-related purposes.
- An employee who uses a car for both business and personal reasons.
In this last situation, “only the portion used for business-related reasons is deductible,” Shannonhouse says.
However, it is unlikely that you will be able to deduct the routine costs you accumulate working for a business as an employee, such as your daily commute.
“The commute to and from work is not considered a business reason,” Shannonhouse says.
On the other hand, work-related driving duties like meeting with clients or making runs to the post office may be eligible for the tax break, she adds.
In addition to small business owners and other self-employed individuals, other types of workers may be eligible to claim car insurance on their taxes:
- Armed forces reservists
- Qualified performing artists
- Fee-basis state/local government officials
If these situations apply to you, Shannonhouse urges you to complete IRS Form 2106, Employee Business Expenses, to figure the deductions for auto expenses. If you have questions regarding your eligibility, it may make sense to talk to an accountant or tax attorney.
Is personal car insurance tax-deductible?
Most people cannot deduct personal car insurance from their taxes. You are only eligible to deduct car insurance if you rack up business expenses.
“Auto insurance premiums related to personal use of an automobile — such as running errands or grocery shopping — are generally ineligible for a deduction on an individual tax return,” Shannonhouse says.
Some people use their cars for both personal and business reasons. In these situations, drivers must determine how much of their driving time is spent on personal affairs and how much time is devoted to business. If 30% of your driving time is devoted to business, this is the amount you can deduct.
It is crucial to note that using your personal car insurance to cover you for business purposes is risky. Understanding exactly how much business coverage you have and what qualifies as a business-related expense is very important and can even impact a claim.
Personal car insurance is designed for personal use, and if you use your vehicle primarily for commercial activities your insurer will not be happy and could even deny a claim. Insurance companies may charge you an additional premium to make sure you are fully covered by your personal auto policy while conducting certain types of business.
Rideshare driving is an excellent example, many insurers offer a rider or endorsement to your policy. which covers you when you are driving for a rideshare company.
If you use your car primarily for business, you will need to purchase a commercial auto policy and if you do not, you might not be covered in the event of an accident which can leave you covering the cost out of pocket.
Talk to your agent to ensure you understand your insurer’s rules around using your car for business purposes.
How to claim car insurance on your taxes
There are two methods of deducting costs on your returns – using the standard mileage rate or actual expenses – choosing the most suitable option is up to you or your tax expert.
If you want to deduct auto insurance expenses, many experts recommend using the “actual car expenses” method, which allows you to deduct costs such as auto insurance, car repairs, gas, vehicle depreciation and other costs.
“Taxpayers are charged with listing out the separate costs of operating an automobile,” Shannonhouse says. “Then, taxpayers are able to deduct a percentage of those costs that can be attributed to miles driven for business-related reasons.”
On the other hand, you can deduct your mileage if you choose the “standard mileage rate” approach. Deducting miles at the standard mileage rate – 67 cents per mile in 2024 – is more financially advantageous than deducting costs using the “actual expenses” method.
Regardless of which method you choose, you will need to keep detailed records regarding your mileage and business-related driving. Talk to your accountant to determine which method is best for you.
What is business-use car insurance and how much does it cost?
Although your personal auto insurance most likely includes some coverage for business-related driving, the best way to fully protect yourself is to purchase a business vehicle insurance policy.
Purchase enough coverage to protect against any accidents or mishaps when using the car for business purposes. Each business and every self-employed individual are different and since circumstances vary so greatly, it is impossible to say how much business vehicle insurance coverage will cost.
However, how you use the vehicle for business – including how often you use it and how many miles you typically drive – will be significant factors in determining how much you will pay.
Learn more: How much you’re likely to pay for car insurance
Which part of my car insurance is tax-deductible if I use my car for both personal and business purposes?
All parts of a standard insurance policy are deductible, meaning your liability coverage is just as deductible as collision or comprehensive coverage but if you are using the vehicle for both personal and business purposes, only the mileage for business-related driving is deductible.
It is important to keep a detailed log of your business driving mileage. You can then calculate your deduction by multiplying your business-related mileage by the standard mileage rate which is 67 cents a mile in 2024. The standard rate changes every year so always use the correct rate when filing taxes.
If you are a rideshare driver, you may be able to deduct the cost of your rideshare policy rider or endorsement. If you have purchased a separate rideshare policy it may be tax deductible as it would be considered a business expense.
Tips for deducting car insurance from your taxes
If you plan to deduct car insurance from your taxes, keeping detailed records in case the IRS questions you is essential. Closely track how you use your vehicle, including a diligent vehicle log that records every mile the car is driven for personal and business use.
“If a vehicle isn’t used solely for work, track the percentage of time the vehicle is used for both personal and business-related purposes,” Shannonhouse says. “As a practical tip, record the starting mile and ending mile each time the vehicle is used, and make note of what the purpose of the drive was.”
Finally, keep all receipts in a safe place.
“Support for all business-related expenses is necessary for proper tax documentation,” Shannonhouse says.
Guide: How to avoid car donation scams and get a tax deduction
Sources
- Association of International Certified Professional Accountants. “Document Retention Question & Answers for Tax Practitioners.” Accessed August 2024.
- Insurance Information Institute. “Insuring Your Business: Small Business Owners’ Guide to Insurance.” Accessed August 2024.
- Internal Revenue Service. “About Form 2106, Employee Business Expenses.” Accessed August 2024.
- Internal Revenue Service. “IRS issues standard mileage rates for 2022.” Accessed August 2024.
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