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Are car insurance premiums tax deductible?

Here's what you need to know...
  • In some cases, your car insurance premiums could be tax deductible
  • If you drive solely or occasionally for business purposes, you could write off a portion of your premium
  • Before you make any decisions, be sure to speak to a tax consultant
Taxpayers are always looking for tax write-offs so they can lower their taxable income and ultimately lower their financial tax liability.

Owning a home, driving for business, relocating for an employer and even hiring a daycare to care for your child can become advantageous write-offs.

If you are a resourceful and inquisitive individual, you might be wondering where car insurance fits in the mix of expenses that are tax deductible.

Unfortunately, the answer to this reasonable question is not as simple as you might think.

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There is no simple answer regarding whether car insurance premiums are deductible; the answer will depend on how you use your vehicle.

If you are driving for what is defined as personal use, there is a good chance that the premiums will be an expense the Internal Revenue Service does not allow taxpayers to deduct.

If the vehicle is used partially or strictly for business, however, that is another story altogether. Read on, and learn about the

Read on, and learn about the write-off guidelines so that you can start your insurance-related tax planning early.

Usage Matters

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When filing taxes, vehicle usage is the major determinant as to whether the premiums paid will be tax deductible. Primary usage is basically what the vehicle is driven for on a regular basis.

Insurance companies ask applicants and policyholders how they intend to use their vehicles so that the company is able to accurately rate the risk.

Some usage types are considered to be much more risky than others because users are in more stressful and congested environments where there is more claim exposure.

Understanding the Various Types of Vehicle Usage

There are three common types of usage that you can select as you are building your auto insurance:

  • Pleasure

When you assign personal usage to a vehicle, you are stating that you drive strictly for personal use. This might be to run errands, to go to the store, to visit a friend, and more.

Personal usage is the least risky classification and comes with the lowest rating in terms of insurance.

This may be the cheapest classification, but it is the only classification where premiums cannot be written off in any circumstance.

  • Commute

When you assign a vehicle a commuter classification, it means that you drive to and from a single job site or you take your children to and from school.

This classification carries more risk than a pleasure classification because drivers are more prone to drive in traffic or in a rush.

Since commuters do not choose when they have to get behind the wheel, they pay higher rates than pleasure users.

  • Business

Business usage is the most complex classification.

One of the main reasons why there can be confusion is because some people can purchase personal insurance for their car driven for business and some need a commercial auto policy for the car in question.

Vehicles are eligible for coverage under a personal policy when the car is a private passenger vehicle for business and personal use.

When a car is classified as business use, it means that the car is driven to several sites or to meetings during the course of the day.

Since business users drive on streets they might not be familiar with, they have a lot more exposure to claims.

The following vehicles will need to be covered under a business policy instead of a personal policy:

  • You carry people for hire
  • The vehicle has more than 2 axles
  • The vehicle is only used for business
  • The vehicle has permanent commercial-grade equipment installed
  • Vehicles are owned by the business and not an individual

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Which types of usage lead to a tax write-off?

Now that you understand the types of usage, you need to learn when the premiums for your required coverage and supplemental coverage can be written off.

There are several different scenarios to consider, and not every case is as cut and dry as the cases that follow.

Be sure that you meet with your tax consultant or personal accountant before you claim your premiums by mistake. Here are scenarios where premiums can be deducted:

  • You Are Self-Employed and Use Your Vehicle For Business

Being self-employed comes with its challenges. It takes a lot of financial resources, a lot of drive, a lot of information, and dedication.

While there can be budgeting constraints all throughout the year, as a start-up entrepreneur you might look forward to tax season because you will qualify for write-offs.

One of these write-offs could be for insurance premiums.

If you have a vehicle that is strictly for business and not for any type of personal use, you can write off the whole annual premium

In order for you to legitimately write off your car insurance premiums as business expenses, you must use your vehicle for business purposes. If the car is used for personal use during your off hours, only a portion of the premium can be deducted.

To determine the portion, you must break up the hours of the day and assign a percentage to personal use and a percentage for business use.

  • You Drive Your Vehicle For Business As an Employee

You do not have to be an entrepreneur to enjoy a write-off. If you are an employee who drives for business and your employer does not reimburse you, the expenses are deductible.

If, however, the employer does reimburse you, you cannot take the reimbursement and the write-off.

Methods for Writing-Off Premiums

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There are two methods to car-related write-offs: Standard Mileage Allowance and Actual Expenses.

If you are eligible for a write-off, you will need to use the Actual Expenses method. In addition to auto insurance, you can write off expenses for repairs, gas, maintenance, rental fees, taxes, and more.

Knowing what you can deduct as you file your taxes is important.

Just because the expenses are deductible in certain scenarios does not mean that you want to pay high premiums each month.

If you are tired of paying high rates with your current insurer, you should compare the rates with other companies.

Start comparing car insurance rates now by entering your zip code in our FREE tool below!

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