Is Your Car Insurance Tax Deductible?

This tax perk is currently reserved for tax returns up through 2017.

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It’s that time of year again. We’re all looking at what we spent money on last year and wondering whether the Internal Revenue Service will give us a tax break for doing so. 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—the tax return you’ll file in 2019.

Tax Law Changes—Unreimbursed Employee Expenses

You could claim an unreimbursed employee business expense deduction up through the 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 that year for each work-related mile you drove, or you could deduct the portion of your overall auto expenses, including insurance, that were attributable to those work-related miles.

In other words, 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 claim an itemized deduction for 25% of your auto expenses, or $2,500. Your employer could not have reimbursed you, and you could only deduct the portion of that $2,500 that surpassed 2% of your adjusted gross income (AGI).

So now let’s say that your AGI for the year was $90,000. 2% of that is $1,800. Your auto deduction just dropped to $700.

The deduction didn’t amount to much for most people, but at least it was a deduction. Unfortunately, the Tax Cuts and Jobs Act (TCJA) eliminated most miscellaneous deductions when it went into effect in January 2018, including the one for these unreimbursed employee expenses.  

More TCJA Changes—Casualty and Theft Deductions

You might’ve 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 now, too, at least for most taxpayers.

Beginning with the 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 the president has declared a disaster. In this case, 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.

If the resulting number exceeds 10% of your AGI, you’ve got a tax deduction. In other words, if your deductible was just a few hundred dollars, you’re probably out of luck.

Congress has enacted special provisions for those affected by Hurricanes Harvey, Irma, and Maria, 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

So is there any good news here? Yes, if you’re self-employed.

In this case, that “unreimbursed employee expense deduction” remains alive and well, 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, filed with your Form 1040.

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, whichever works out to be more. The standard mileage rate for 2018 was 54.5 cents per mile. It goes up to 58 cents a mile in 2019.

Allowable auto expenses include:

  • Fuel
  • Oil
  • Tires
  • Maintenance
  • Repairs
  • Loan interest
  • Depreciation
  • Insurance

So if you drove your vehicle 50,000 miles overall during the course of the year, and if 15,000 of those miles were related to your business, you can deduct 30% of your overall allowable auto expenses.

If you maintain a home office, your miles begin from the moment you leave your driveway for business reasons, 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.

Exceptions to the Usual Rules

The business expense deduction for auto costs on Schedule C does not cover vehicles that can be 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: $10,000 during the first year of ownership as of 2018, plus a possible $8,000 for “bonus” depreciation, for the tax year 2018. That’s one expensive vehicle.