Car insurance is a necessary cost that nobody likes to pay. It sure would be nice if it were tax-deductible.

As it turns out, the cost of car insurance for your automobile might be tax-deductible, but only in specific circumstances. Here is what you know about whether you can get a tax break on the cost of personal car insurance.

Key Highlights
  • You can claim car insurance on your taxes if you use your car for business matters.
  • According to the IRS, the standard mileage rate for the use of vehicle for business purposes is 58.5 cents per mile driven for business use, an increase of 2.5 cents from 2021.
  • If you plan to deduct mileage on your taxes, keep your receipts and a diligent vehicle log that records every mile the vehicle is driven for personal and business use.
  • Work-related driving duties like meeting with clients or making runs to the post office might be tax-deductible but your daily commute is not.

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:

  • Business owner who owns and is dependent on the use of company cars or a fleet of vehicles.
  • Self-employed individual who uses a vehicle exclusively for business-related purposes.
  • 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.

Expert Advice
Sarah Shannonhouse - Manager for tax practice & ethics with the American Institute of CPAs
Sarah Shannonhouse
Certified public accountant & manager for tax practice & ethics with the American Institute of CPAs

“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 businesses owners and other self-employed individuals, there are other types of workers who may be eligible to claim car insurance on their taxes: Armed forces reservists, qualified performing artists and 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.

Is personal car insurance tax deductible?

Most people cannot deduct personal car insurance from their taxes for personal expenses that they incur. Instead, you are only likely eligible to deduct car insurance if you rack up business expenses.

Expert Advice
Sarah Shannonhouse - Manager for tax practice & ethics with the American Institute of CPAs
Sarah Shannonhouse
Certified public accountant & manager for tax practice & ethics with the American Institute of CPAs

“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 such situations, drivers must determine how much of their driving time is spent on personal affairs and how much time is devoted to the 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 can be risky. It is likely that your personal auto insurance grants you some coverage for business use of the car, according to the Insurance Information Institute (III). But you must understand exactly how much of this coverage you have.

Insurance companies may charge you an additional cost to make sure you are fully covered by your personal auto policy while conducting business. If you use your car primarily for business, you may be required to purchase a commercial auto policy and if you do not, you might not be covered in the event of an accident.

Talk to your agent to make sure 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 – choose which option is the most suitable for you.

If you want to deduct auto insurance expenses, you should use the “actual car expenses” method, which allows you to deduct expenses such as auto insurance, car repairs, gas, vehicle depreciation and other costs.

Expert Advice
Sarah Shannonhouse - Manager for tax practice & ethics with the American Institute of CPAs
Sarah Shannonhouse
Certified public accountant & manager for tax practice & ethics with the American Institute of CPAs

“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 – 58.5 cents per mile in 2022 – is more financially advantageous than deducting costs using the “actual expenses” method.

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.

If you go this route, be sure to purchase enough coverage to protect against any accidents or mishaps that might occur when you are 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 you.

However, the way you use the vehicle for business – including how often you use it and how many miles you typically drive – will be major factors in determining how much you will pay.

Learn more about how much you might pay for car insurance.

Tips for deducting car insurance from your taxes

If you plan to deduct car insurance on your taxes, it is important to keep good records in case the IRS questions you.

For example, Closely track how you use your vehicle, including a diligent vehicle log that records every mile the vehicle is driven for personal and business use.

Tip iconExpert's Tip

“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.

If you need more guidance, she suggests consulting the AICPA’s Document Retention FAQs for Tax Practitioners.

Check out our experts’ recommendations on How to avoid car donation scams and get a tax deduction

Sources:

  1. Association of International Certified Professional Accountants - "Document Retention Question & Answers for Tax Practitioners."
  2. Insurance Information Institute - “Insuring Your Business: Small Business Owners' Guide to Insurance.
  3. Internal Revenue Service - “About Form 2106, Employee Business Expenses.
  4. Internal Revenue Service - “IRS issues standard mileage rates for 2022.