Can I Claim My Vehicle Insurance Premiums on My Tax Returns?
The process for claiming tax deductions for vehicle insurance depends largely on your employment status. The IRS regards a person as an independent contractor when the payer controls only the results of the work, and not the work to be done, or how the work is done. The IRS regards a person as an employee when the payer controls what work is done and how it is to be done. Different rules apply for each type of employment and available deductions related to vehicle use.
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How To Take a Deduction
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As an independent contractor, you receive a 1099-MISC at the end of the year for income earned from working for a company or client. A company or client may or may not reimburse you for vehicle expenses you incurred during the period of work you did. If expenses are not reimbursed, then you may claim these on your tax return. When you're an employee, you receive a W-2 for income you earn. Independent contractors deduct vehicle insurance expenses using schedule C of their 1040 tax return, while employees itemize deductions on schedule A.
Process
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Deduct the actual expenses incurred for vehicle insurance, but only as it relates to business use of the vehicle. Any personal use of your vehicle is not deductible. If you're an independent contractor, add up the mileage you drove for business purposes and calculate this as a percentage of the total use of the vehicle. For example, if you drive 100 miles, and 50 of those miles are for personal use while 50 miles are for business use, then you only use the vehicle 50 percent of the time for business use. You may only deduct 50 percent of your insurance premiums for the vehicle. Employees use IRS form 2106 to calculate employee business expenses related to vehicle insurance. Write in the insurance premium on line 23, Part II, section C, of this form.
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Warning
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Regardless of whether you're an employee or an independent contractor, you can only deduct insurance premiums based on the business use of your vehicle. If you deduct more than the amount you are allowed, the IRS will disallow the deduction and you may be liable for penalties for under-reporting the tax you owe. Keep a log book of your mileage if you use the vehicle for both personal and business use. If the IRS audits you, you must prove that the vehicle was used for business and the mileage driven.
Consideration
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You may take a deduction for the mileage you drive in lieu of deducting the insurance premiums you pay for insuring your vehicle. This applies for both independent contractors and employees. You should calculate the savings you get using both methods before choosing which is the better deal for you. The IRS updates the per-mile deduction rate for mileage each year. If you deduct mileage, you cannot simultaneously deduct costs for insurance on your vehicle. You must choose one or the other.
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