Even in robust economic times, most people look for every possible way to reduce their tax burden. When money is tight, this impulse becomes that much stronger. Many people pay insurance premiums for their homes, cars and health. Some have additional homes as rentals, while others insure their lives for their family's financial security. If you were able to deduct all this money, you would reduce your tax liability substantially.
Different types of insurance have different taxation rules, so the best thing to do is consult a tax professional before you attempt to deduct any insurance premiums from your income, to avoid a potential audit. The general rule for personal insurance such as auto, home and umbrella policies is that you cannot deduct the premiums from your taxes. There are exceptions, of course, but do not deduct these expenses if you are in doubt.
Rental Property Insurance
If you own more than one home and rent the extras to other people for additional income, the rent you collect is taxable income; but some of the expenses you pay to get that income are deductible. If you carry a mortgage on these homes, your lender likely requires you to insure them. Even without a mortgage, insurance is a good financial idea. The premiums you pay to protect these rental homes are deductible as a business expense, as of tax year 2010.
If you own a disability insurance policy, the best thing you can do is speak with a tax professional regarding the taxation of both the premiums and the benefits. The rules for this type of insurance are complex. Generally, if you pay the premiums yourself with after-tax dollars, some or all of the benefits may be tax-free for you. However, if you pay premiums with pre-tax dollars, or if your employer pays the premiums for you, you may owe taxes on the benefits.
Health insurance is also a complicated matter you should discuss with your accountant. Typically, you cannot deduct health insurance premiums from your taxes. In some business cases, the premiums may be tax deductible. For non-business use, you may be able to itemize your health insurance premiums as deductions if they exceed 7.5 percent of your adjusted gross income. This does not apply to many people.
Do not attempt to deduct your life insurance premiums. One of the great benefits of life insurance proceeds is that they are not considered taxable income, in most cases. This means your beneficiaries can receive a lot of money to cope with your death without worrying about the IRS. However, if you deduct the cost of the life insurance from your income, the proceeds may become entirely taxable. The cost isn't worth it.