Like most of us, you’d like to get as much money back as possible. After all, you worked hard all year and can’t wait to get your hands on a big, juicy check from the Internal Revenue Service.
To start you off on the right foot, a quick online search will list hundreds of articles that reveal frequently overlooked tax deductions—everything from investments and moving expenses to charitable work and student loans.
Here, we’ll take things one step further. With the help of industry professionals, we’ll zoom in with pinpoint precision on auto and homeowners insurance tax deductions and write-offs.
Let’s start by quickly discussing some basics.
Is There a Difference Between a Tax Deduction and a Tax Credit?
According to the Tax Policy Center at the Urban Institute & Brookings Institution, a tax credit is one that directly reduces an individual’s tax burden; it’s subtracted from the overall tax liability.
On the other hand, a tax deduction is one that reduces an individual’s taxable income.
For example, if your total income last year was $100K and you received a $10K tax deduction as a result of an exemption, you would only be taxed on $90K of this.
But if you had a tax liability of $5K and received a $1K tax credit, this would reduce what you owe to the federal government to $4K.
According to many industry professionals, dollar-for-dollar, a tax credit is preferable to a deduction. With this said, keep in mind that we’ll only discuss tax deductions here; not credits.
Is Auto Insurance Tax Deductible?
The bottom line is that your auto insurance premiums aren’t tax deductible if your vehicles are used solely for personal purposes. This includes commuting to and from a regular place of business, as long as you’re not on the clock while doing so.
Potential Tax Benefits Related to Business Expenses and the Self-Employed
On the other hand, Jayson Mullin, owner and founder of Top Tax Defenders, let us know that “If your car is being used for business purposes, there is a chance that your auto insurance premiums could be deducted. This will be calculated depending on how much your car is being used for the business.”
Lisa Greene-Lewis, CPA and editor of the TurboTax blog, adds that “If you use a car for your business, you can also deduct your actual expenses like gas, repairs, tires, and oil based on the portion of your business use of your vehicle.”
Here’s how it works: First, the IRS indicates that if you use your vehicle for both personal and business reasons, you’ll need to determine the percentage of each. Then, you’ll need to divide the total cost between the business and personal parts.
As an admittedly simplistic example, let’s say you paid $2,000 in auto insurance premiums, $3,000 in gas, and $1,000 in auto repairs last year. This means that if you used your vehicle for business 50 percent of the time, you might be able to deduct $3,000 of this on your tax return.
Pro tip: According to Investopedia, though, you can only deduct this premium if you’ve elected to report actual expenses and costs, and decided not to take the standard mileage rate. Let’s quickly discuss this next.
What Is the IRS Standard Mileage Rate?
For 2017, the IRS allows those who are self-employed or who use their vehicle for business purposes to deduct 53.5 cents per mile. This is multiplied by the number of business miles you drove for the year.
So, if you drove 10,000 miles last year for business purposes and decided to opt for the standard mileage rate instead of claiming actual expenses (which would include auto insurance premiums), you’d be able to deduct $5,350.
Pro tip: While Scott Stratton, president of Good Life Wealth Management, notes that most people use the standard mileage rate, he recommends: “If you don’t mind tracking both your mileage and your expenses, at the end of the year, you can calculate which method gives you a bigger deduction.”
As an added tip, he told us that, for households with two or more vehicles, it might make sense to have one of those cars designated as exclusively for business (if you can and need it, of course). In that case, you could have the business pay for all costs as a business expense.
Are Homeowner’s Insurance Premiums Eligible for a Tax Write-Off?
Similarly, Scott emphasized that you may be able to deduct a portion of your homeowner's insurance premium as a business expense, as long as you use a part of your home for business purposes.
Even if it’s not used for business, you can still deduct the cost of your private mortgage insurance (PMI) if you put down less than 20 percent on your home.
To do this, Lisa Greene-Lewis notes that you should be aware of your total home size, as well as the size of your home office, since this deduction is based on the portion of your home used for business (ex: if your home office is 10% of your home’s total square footage, you can deduct 10% of your home insurance premiums).
In addition to your home insurance, you also may be able to deduct the appropriate percentage of related bills such as utilities, mortgage or rent expenses, and general maintenance, Lisa says.
Pro tip: When filling out your tax return, many filers make the mistake of putting this information on Schedule C, when the correct place is on Form 8829 (Expenses For Business Use of Your Home), line 17.
Outside of this, Jayson Mullin said the only other way to deduct the cost of homeowner’s insurance is if you’re a landlord and claim income on a property you own and rent to others. This also includes premiums for affiliated coverage, such as an umbrella liability policy.
According to these experts, are there any potential drawbacks related to deducting the cost of auto and homeowner’s insurance on your taxes?
What Are Some Potential Auto and Homeowners Insurance Tax Penalties?
Jayson Mullin emphasized that if you're running a business from home, having precise tax returns is a must. Because, while deducting your home and auto expenses can be a huge help come tax time, they are also the deductions the IRS scrutinizes the most:
“If the IRS feels you have underreported your income or fraudulently deducted your home or auto expenses, you could face a tax fraud penalty. There are also penalties for underpaying and accuracy on your returns, so working with a tax professional should always be a consideration to keep you and your business out of hot water.”
Similarly, Lisa Greene-Lewis says that if you want to deduct your home office space, make sure it’s used exclusively and regularly for your business.
Pro tip: To avoid making mistakes, she recommends immediately recording direct expenses, like an exclusive business line or repairing the office, as well as indirect expenses, like homeowner’s association fees and security system upkeep costs, that you incur each year.
From a premium deduction standpoint, Lisa notes that there is an exception for home daycare, so be sure to double check with the IRS as to whether or not you qualify. Let’s carry this thought over to the next section.
Important: Insurance Eligibility Concerns Related to Auto and Home Business Exposures
Sure, boosting your tax return is great, but it’s ultra-important to outline that some business exposures that could reduce your tax burden could also make your home or auto insurance ineligible—or, in a best-case scenario—drastically increase what you pay.
In a past life, I spent nearly a decade as a personal lines insurance underwriter and dealt with tens of thousands auto and homeowner’s policies. And during that time, I learned that companies could have vastly different eligibility and pricing guidelines when it came to business exposures.
For example, while nearly all personal auto policies specifically excluded livery (e.g. using your vehicle as a taxi), some applied steep surcharges for vehicles used by delivery drivers, while others didn’t bat an eye.
Further, some carriers allowed certain business exposures at home (even with client traffic or light manufacturing) and only excluded those with the most potential for risk, such as in-home daycares. I found that others prohibited anything other than a small home office. What’s the point?
If you use your vehicle or home for business in any way, be sure to reach out to your agent. After some discussion, they might decide that your existing policies are fine, or they might recommend specific business insurance to ensure you’re adequately covered in the event of a loss.
What’s the Bottom Line About Tax Deductions on Your Home and Auto Insurance?
Using your home or car for business purposes can be a great way to meaningfully increase your tax return this year, including deductions for your insurance-related expenses. And we outlined some of the methods you can use to accomplish this.
But based on what we learned from industry professionals, unless you’re closely familiar with the ins and outs of claiming business expenses, it’s important that you reach out to others who can maximize how much money you get back from the federal government, while making sure you’re fully covered based on your unique business exposure.