Certain auto expenses, like car insurance, were once tax deductible if you itemized, depending on why you used your car. But the rules changed beginning in 2018. Only a few select employees remain eligible to deduct unreimbursed employee expenses in tax years 2018 through 2025, and this includes auto insurance premiums.
The eligible 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.
To have claimed the miscellaneous deduction, you could not have been reimbursed by your employer, and you could have only deducted the portion of your car expenses that surpassed 2% of your adjusted gross income (AGI). Let’s say your AGI for the year was $90,000, making 2% of that $1,800. This was the itemized deduction limit for your total miscellaneous expenses for the tax year 2017, including your car insurance.
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 pay out of pocket for 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 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 2022 is 58.5 cents per mile, up 2.5 cents from the 2021 rate.
Allowable auto expenses include:
- Fuel & Oil
- Garage Rent
- Repairs and Maintenance
- Registration Fees
- Lease Payments, if applicable
- Tolls and Parking Fees
For example, in 2022, if you drove your car 50,000 miles and 15,000 of those miles were for business use, you could deduct 30% of your overall allowable auto expenses.
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 those used for construction. There are also limits on depreciation claimed on certain vehicles, although they’re pretty generous: The maximum deduction for most passenger vehicles put into service after 2017 is $18,100 during the first year of ownership as of the 2020 tax year.