Can Auto Insurance Be Deducted on Tax Return?

Jake Wayne for Demand Media  writes: At tax time, it pays to maximize your deductions by finding every category you could possibly qualify for. Some deductions are clear-cut, like the standard deduction for each adult and child in your family. Other deductions, like your auto insurance, are trickier. If you use your automobile to operate your business or to run errands for your boss, you can deduct a portion of your auto insurance on your taxes. 

The Usual Case

For most personal taxes, auto insurance is not a deductible expense. Like most day-to-day expenses, the Internal Revenue Service considers that the standard deduction reflects such routine costs. In this way, it's treated like your utilities, rent payments or entertainment expenses.

Mileage Deductions

If you drive your car for work, you can claim mileage costs as a deduction on your itemized taxes. This does not apply to mileage you accrue driving to and from work but only to driving you do as part of the job itself -- and only if your boss doesn't compensate you for it. A traveling salesman accrues this kind of miles, as would anyone using a personal car to run work errands during the workday or someone driving between two different job sites. It's also possible to deduct mileage you incur while driving to and from medical appointments. If you qualify to deduct this kind of usage, the per-mile deduction is intended to reflect all the costs of using your vehicle, including what you pay to keep it insured.

Business Expenses

If you own a business, you can deduct auto insurance you buy for that business just like you would any other operating expense. If you run a sole proprietorship or otherwise use a car for both business and personal use, you can work out what percentage of your use was for the business and deduct a proportional amount of your auto insurance -- and all costs related to operating the auto -- as a business expense. This is instead of, not in addition to, the standard per-mile deduction.

Keeping Logs

If you are claiming mileage or usage deductions on your vehicle, you will need to keep a log of the miles you drive. This can be a simple odometer reading on a vehicle used entirely for business. For a car you drive on personal and business use, you should keep a record of the distances and reasons for each trip. Google Maps and similar utilities can be a real help here.

Common Sense Caution

Tax law is complex and and you can face serious penalties even if you've made an honest mistake. If you plan to take a deduction on auto insurance, even if you're reasonably sure you're allowed to, it's best to confirm your plan with an accountant, tax attorney or similar expert.