Money is tight and likely to get tighter. One of the ways you can keep a few more pennies in your personal piggy bank is to maximize your income tax deductions. Don’t overlook the allowable insurance tax deductions. Under certain circumstances, many types of insurance can be deducted including car insurance. The following are some guidelines for when you can and can’t claim your auto insurance as a federal tax deduction. As always, you should consult the IRS or a tax professional to make sure you are legitimately entitled to use these strategies and which strategy makes the best financial sense for your situation.
If you drive your car or truck for business, you may be eligible for a car insurance tax deduction. This tax break is generally available if you are self-employed and file Schedule C, or use your vehicle to conduct business for an employer and file Form 2106 Employee Business Expenses (and do not collect reimbursement for mileage or expenses).
The catch is that you have to make a choice between deducting mileage (other than your commute to and from your office) or deducting actual vehicle expenses. Choose wisely because if you file a return using the actual expenses deduction, you can’t switch to mileage on subsequent returns unless and until you sell or trade the vehicle. However, if you start with mileage in the first year you use the vehicle for business, you can switch to actual expenses in any subsequent year that doing so would yield you a larger deduction. Piece of cake, huh? If you think that information is succinctly explained on the tax forms, you are an optimist.
If you file Schedule C and opt for mileage, you get the standard mileage rate (55 cents per business mile driven in 2009). You can also deduct the total of personal property tax (PPT) paid on the vehicle and any vehicle loan interest. (The PPT and interest are pro-rated between personal and business use). If you go this route, you cannot deduct your car insurance.
However, it you opt for the actual cost method of figuring your vehicle expenses, you can deduct depreciation on your vehicle, as well as whatever money you spent on gas, oil, maintenance costs, tires, licenses and repairs, along with your auto insurance premiums.
Note that if you are filing the Form 2106 Employee Business Expenses, you can also opt for the standard mileage rate (but you don’t get the interest and PPT deduction or the car insurance tax deduction); or you choose actual cost deductions with all the deductibles that method allows.
Whatever your situation, remember to hang onto all your receipts and keep a detailed, current log of your business miles just in case you ever have to provide proof.