As a general rule, auto insurance isn’t tax deductible. However, if you use your vehicle for work, some or all of your insurance expenses may be eligible to offset your income as part of a larger auto business use deduction. While many take the standard mileage deduction, which changes every year, itemizing your expenses may offer you a better deal.
Business or Pleasure
Vehicles that only are used for business are easy to handle – all expenses can be used to figure your deduction. If you mix business and personal use, you have to figure what percentage of your vehicle use is business-related. Determine the actual cost of operating your vehicle, including insurance, lease payments, gas, repair bills and other expenses. When you arrive at the total, multiply that number by the percentage of your vehicle use dedicated to business. If you have $5,000 in expenses, for example, and use your car for business 50 percent of the time, you would multiply $5,000 by 0.50 to arrive at $2,500.
Employee or Owner
How much the deduction impacts your taxes is determined by the nature of your work. If you’re an employee of another company -- and you aren't reimbursed for auto expenses by your employer -- the deduction falls into the “unreimbursed employee expenses” bucket. You can only deduct these to the extent that the expenses exceed 2 percent of your adjusted gross income. However, if you operate your own business, you can use any tax deduction on your Schedule C to offset business income and reduce the amount you’ll owe in taxes.
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