When And How Is Your Car Insurance Tax Deductible?
This tax perk is reserved for tax returns up through 2017
It used to be that some auto expenses, like car insurance, were tax deductible under some circumstances if you itemized, depending on why you used your car. But the rules changed beginning in 2018. Only a select few employees are still eligible to deduct unreimbursed employee expenses in tax years 2018 through 2025, which can include auto insurance premiums.
These employees include qualified performing artists, fee-basis local or state government officials, Armed Forces reservists, and employees with impairment-related work expenses. And the deduction could return in 2026 after the Tax Cuts and Jobs Act (TCJA) expires.
Tax Law Changes—Unreimbursed Employee Expenses
You could claim an unreimbursed employee business expense deduction up through tax year 2017 if you itemized your deductions and you incurred auto expenses due to driving for your job. You could deduct either the standard mileage rate for each work-related mile you drove per year, or you could deduct the portion of your overall auto expenses, including insurance, that were attributable to those work-related miles.
You could claim an itemized deduction for 25% of your auto expenses, or $2,500, if you spent $10,000 on all costs associated with your vehicle, and if you drove 20,000 miles overall and 5,000 of them were required by your employer. You could not have been reimbursed by your employer, and you could only deduct the portion of that $2,500 that surpassed 2% of your adjusted gross income (AGI).
So let’s say that your AGI for the year was $90,000, so 2% of that would be $1,800. Your auto deduction just dropped to $700, or the portion of $2,500 that exceeds 2% of your AGI.
More TCJA Changes—Casualty and Theft Deductions
You might have potentially qualified for an itemized casualty and theft deduction if your auto sustained serious damage and you had to come out of pocket and pay an insurance deductible for replacement or repairs. Claiming that part of your insurance—the deductible—was subject to myriad rules and was included in the deduction for your loss. But it’s gone, too, for many taxpayers under the terms of the TCJA.
Beginning with tax year 2018 and thanks to the TCJA, you can only claim this itemized deduction if your vehicle was damaged or destroyed due to an event that is declared a disaster. Your deductible loss is limited to what you paid for the vehicle or what it’s worth after the disaster, whichever is less. You must subtract anything your insurer paid or compensated you for, then you must subtract an additional $100.
You would have a tax deduction if the resulting number exceeds 10% of your AGI.
Congress has enacted special provisions for those affected by the 2020 hurricanes, as well as the California wildfires. Check with a tax professional if you suffered a loss due to one of these events to find out if you qualify.
Business Use of Your Vehicle
A version of the “unreimbursed employee expense deduction” remains alive and well if you’re self-employed, and you don’t have to itemize to claim it. You would include your auto costs as a business expense on Schedule C, Profit or Loss From Business, which must be filed with your Form 1040 tax return.
As with the itemized deduction, you can deduct a portion of your overall auto expenses equal to the percentage of miles you drove for business purposes during the tax year, or you can deduct the standard mileage rate per mile driven. The standard mileage rate for 2020 was 57.5 cents per mile. It drops to 56 cents per mile in 2021.
Allowable auto expenses include:
- Loan interest
You could deduct 30% of your overall allowable auto expenses if you drove your vehicle 50,000 miles overall during the course of the year, and 15,000 of those miles were related to your business.
Your miles begin from the moment you leave your driveway for business reasons if you maintain a home office, less any side trips you might make for personal reasons. Otherwise, your miles begin when you leave your business location. Commuting from home to there is considered a personal expense and isn't deductible.
Exceptions to the Usual Rules
The business expense deduction for auto costs on Schedule C doesn't cover vehicles that are considered “equipment” for tax purposes, such as dump trucks or vehicles for hire, like a taxi or airport shuttle. There are also limits on depreciation claimed on certain vehicles, although they’re pretty generous: a total of $10,100 during the first year of ownership as of the 2020 tax year.