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Tax Planning Tips: Auto Insurance

It's no secret that auto insurance can safeguard your assets and provide you with peace of mind. But did you know that auto insurance may also benefit you at tax time? Certain insurance-related costs can be deducted on your individual federal income tax return. You'll need to know what can be deducted, and how insurance reimbursements can affect those deductions.

You can't deduct your auto insurance premiums if you use your car only for personal purposes

If you use your motor vehicle only for personal purposes (like most people), you can't deduct your auto insurance premiums on your tax return.

If you use your car for business purposes, you may be able to deduct some car-related expenses, including insurance premiums

Whether you're self-employed or an employee, you may be able to deduct certain car-related expenses if you use your car for business purposes. However, if you use your car on business and your employer fully reimburses you for your expenses, you can't deduct those expenses. If you use your car for both personal and business reasons, you can deduct only that portion of your car expenses that can be traced to business use. (For individual taxpayers, commuting to work normally doesn't qualify as business use.)

At tax time, you take your deduction as a miscellaneous itemized deduction. Miscellaneous itemized deductions are deductible only to the extent that they total more than 2 percent of your adjusted gross income (AGI). So, if 2 percent of your AGI equals $2,000 and your total miscellaneous itemized deductions (including business-related auto expenses) only come to $1,900, you won't be able to deduct your auto expenses on your tax return.

There are two methods for calculating auto expense deductions--the standard mileage allowance and the actual expenses method:

  • Standard mileage allowance: If you own or lease a car and are not reimbursed for the business use of your vehicle, you may be able to calculate your deduction using the standard mileage rate (51 cents per business mile for the first half of 2011 and 55.5 cents per business mile for the second half of 2011). Several requirements apply, however. You can also deduct the cost of business-related tolls and parking (but not commuting-related tolls and parking).
  • Actual expenses method: You may be able to deduct the actual cost of using your vehicle for business. Your business expenses can include depreciation, tolls, parking fees, insurance premiums, repairs, gas and oil, rental fees, lease fees, excise taxes, and garage rental fees (to the extent that the costs were related to business and not your personal use).

No matter which method you use, the IRS requires that you keep careful records of your business travel, including the dates you used your car, the number of miles driven, and the reason for the travel on business-related tasks.

If your car is stolen or damaged, you may be able to claim a theft or casualty loss deduction

If your car is stolen, damaged, or destroyed in an accident or by an act of nature (e.g., fallen tree, flood), you may be able to claim a theft or casualty loss tax deduction if your auto insurance coverage does not completely reimburse you for your loss. (A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.)

For individual taxpayers, the casualty and theft deduction is an itemized deduction that is subject to two limitations. First of all, you can't deduct the first $100 of any loss. So, if your $99 used radio is stolen from your car, you're out of luck (at least in terms of a deduction). Second, even if your loss exceeds $100, you can only deduct casualty and theft losses if the total amount you lost in the year (after the $100 per casualty threshold) exceeds 10 percent of your AGI.

You must file federal Form 1040 and itemize your deductions on Schedule A to claim a casualty or theft loss deduction. Use Form 4684 to figure the amount of your deduction, and consult a tax professional if you need help.

If you're reimbursed for your loss, you must subtract the reimbursement when calculating your loss. In other words, you do not have a casualty or theft loss to the extent you are reimbursed. If your property is covered by insurance, you should file a timely insurance claim for reimbursement of your loss. Otherwise, you may not be able to deduct your loss. Generally, you must also file a police report for any theft losses.

What about auto insurance deductibles?

Auto insurance protection does not begin until the deductible has been satisfied. So, if you have an auto insurance policy with a $500 collision deductible and you get into an accident, you'd have to cover the first $500 of your loss out of pocket. At tax time, though, this deductible may be written off on your tax return (subject to the $100 and 10 percent rules) as a casualty loss if you meet all necessary requirements. However, you can't deduct a casualty loss involving a car accident if your willful negligence or willful act caused the accident.