If you find yourself in your vehicle more often than not as a normal course of business, then you might be wondering if it’s possible to deduct your auto insurance on your taxes. While the quick answer is yes, figuring out if that deduction applies to your exact situation is a lot more complicated. According to Michigan-based insurance consultant Peter Vitale, proactive knowledge is key in determining your status.
As with all tax rules, you must verify that the usage of your vehicle aligns with the requirements to avoid landing in hot water. Otherwise, you could end up audited and paying back the deduction in no time flat.
Thankfully, Peter Vitale can help you figure out if your auto insurance is tax deductible for the 2020 tax year and beyond. Just move through the following questions to learn when and why you can use your car insurance as a deduction on your taxes.
Are You Self-Employed or Will Itemize Your Expenses?
You can often deduct vehicle-related expenses, including car insurance premiums, if you use your car all or part of the time to complete your business activities. You must either be a self-employed business owner or work for a company that requires personal use of your vehicle. If you are employed by another entity, you need to plan to itemize your expenses. Here’s an in-depth look at both of these scenarios.
Unreimbursed Employee Expenses
If you work for someone else, but regularly use your personal vehicle as a part of your job, you may list your car insurance, mileage, and other expenses as a deduction on your taxes.
Employees who regularly take this deduction include:
- Delivery drivers
- Ride-share professionals
No matter what field you’re in, you can only claim this deduction if your employer does not reimburse your expenses already.
In addition, you must plan to itemize your expenses, not take the standard deduction. When you itemize, you will add those items under the unreimbursed employee expenses section.
You can calculate this deduction in one of two ways. You can either use your exact mileage to claim the standard mileage rate. Conversely, you can claim 25% of all your expenses, including car insurance, auto repairs, and fuel. The standard mileage rate for 2020 is 57.5 cents for each mile, while the 2021 rate is 56 cents per mile.
If you claim a portion of your expenses, Michigan insurance pro Peter Vitale wants you to know to only deduct the amount that exceeds 2% of your adjusted gross income, or AGI. If you have an AGI of $100,000 and $4,000 in expenses, for example, you can claim a $2,000 auto deduction for that year.
Rules for Self Employed Individuals
If you are self-employed, you do not need to itemize your expenses to deduct your vehicle-related costs of doing business. Instead, you must put all your deductions, including car insurance, on your Schedule C, Profit or Loss from Business form, which you submit with your completed Form 1040.
As with unreimbursed employee expenses, you can either take the standard mileage deduction of 57.5 cents per mile for 2020. Conversely, you can claim a portion of all your expenses if you drove more than 50,000 miles for the year total. Only 15,000 of those miles need to be for your business endeavors, however.
Unlike employees who are capped at 25%, self-employed individuals are able to claim 30% of all their vehicle-related expenses, which can make it worth writing down each item.
Beyond car insurance premiums, the items that may qualify include:
- Vehicle maintenance and repairs
- Gasoline or diesel fuel
- Interest on the auto loan
- Depreciation of the vehicle value
- Parking fees and roadway tolls
You can only apply expenses related to the business use of your vehicle. So, if you use your car for personal reasons half of the time, reduce your expenses by half before deducting them. If you go for the mileage deduction instead, you must have all the business-related mileage written down for the year.
Is Your Vehicle Considered Business Equipment?
Peter Vitale urges you to assess whether your vehicle is considered equipment before putting vehicle-related expenses on your Schedule C tax form.
Vehicles that the IRS considers equipment includes:
- Dump trucks and other heavy equipment
- Shuttles with seating for nine or more
- Classic cargo vans
If you’re using these types of vehicles for your business, you may need to follow Tax Code 179 to cover their cost. This code allows you to claim the full value of the equipment in its first year of use. Alternatively, you can claim a portion as depreciation over several years.
Are You Keeping Track of Insurance and Other Expenses?
If you want to claim a portion of your vehicle-related expenses, like auto insurance premiums, on your taxes, you need to track every last dollar spent throughout the year.
You’ll want to tuck all your receipts away for review at the end of the year, including for:
- Fuel fill ups
- Oil and other coolant
- Auto shop payments
- Tire purchases
- Auto insurance premiums
- Road tolls
- Auto loan interest
If in doubt, keep the receipt so you can go over it with your trusted tax professional. If you do not keep track of all these expenses, you won’t be able to claim the costs on your taxes, so keep them in a safe spot.
Do You Record Your Mileage For All Business Endeavors?
Beyond tracking all your vehicle-related expenses, you also need to take note of the mileage you put on your vehicle. To properly track your mileage for all business endeavors, keep a notebook in your car. Start by writing down your starting mileage on January 1st, and then, at the end of the year, write down the mileage on December 31st.
Then, write down the odometer reading before you leave your driveway, then again when you arrive at your destination. Repeat this process every time you go anywhere for your job or business. Also, subtract any side trips you take for your personal activities. If you stop at the store for dinner in between your business activities, for example, subtract the mileage from your current location to the store.
At the end of the year, you can add up all the miles for your business-related travels. Subtract that from the total number of miles to see your ratio of business to personal use of the vehicle. You don’t have to complete this final step if you don’t use the vehicle for personal reasons.
Was Your Vehicle Stolen or Totaled in an Accident?
Insurance Consultant Peter Vitale wants you to remember that auto insurance deductibles only qualify as a tax deduction if the damage occurred in a natural disaster. In the past, tax rules allowed you to deduct the amount paid out of pocket for any business use vehicles deemed a total loss due to theft or an accident.
Unfortunately, that’s no longer the case. Under the current rules, you can only deduct the amount that exceeds 10% of your AGI if caused by an earthquake, wildfires, or other natural disasters. So, if you made $100,000 in the year, you could only claim eligible vehicle losses that were over the $10,000 mark.
Figuring Out Your Total Tax Deduction for Auto Insurance
Since you have a choice on which type of tax deduction to take for your vehicle-related expenses, run the numbers to see which one benefits you the most. When you take the mileage deduction, the figure is meant to cover all your expenses from fuel to auto insurance. If you decide to write down all your expenses, then you can tick off each one and get a portion back as a deduction.
Either way, make sure that you do not include any personal travel expenses in your calculations. Even daily commutes to and from work are considered personal travels, so be careful about that while doing your taxes. If you are at all uncertain, make sure to go to a trusted tax professional for help completing your forms.
About Michigan Insurance Pro Peter Vitale
For the past 10 years, Peter Vitale has served as Michigan’s leading insurance expert. He began his journey by acting as an Executive Account Manager for Allstate Insurance before opening up his own agency in 2014. After becoming the fastest growing agency in the state in 2016, he decided to become a consultant for small insurance companies. In that role, he helps agencies best support all their customers, expand their reach, and become truly profitable. Peter Vitale has earned many awards and accolades along the way, including the North Central Region Honor Ring qualifier, but the biggest reward is his ability to give back to his community.