Posted : 02/19/2013
It's that joyous time of the year when we figure out our tax obligations. As you travel down the bumpy road of deductions, you may be able to write off a few car expenses, including some tied to insurance.
Auto insurance premiums and business use of your car: Are you self-employed and use your vehicle on the job? Or are you employed but use the car for work-related reasons at least part of the time, without being reimbursed for expenses by your boss? If so, then you may be able to deduct some of your insurance premiums, says Leonard C. Wright, a San Diego-based financial planner and spokesperson for the American Institute of Certified Public Accountants.
First, you have to determine how much your vehicle is used for work, says Wright. For example, if your car is used 75 percent of the time for business and the rest of the time for personal driving, then you can typically base your deductions on that split of percentages. In this case, you would deduct 75 percent of your auto expenses, including insurance premiums, gas, oil, repairs, registration fees, lease payments, depreciation, parking and toll fees.
You'd list the expenses as miscellaneous itemized deductions. But keep in mind that you can only qualify for these deductions if they total more than 2 percent of your adjusted gross income. In other words, if 2 percent of your gross income is, say, $1,000, your expenses would have to be above that to claim all the write-offs.
The alternative is taking the standard business mileage deduction. The Internal Revenue Service has set it at 55.5 cents a mile for 2012, with all expenses (including insurance premiums) figured in that rate. There are restrictions, however, and Wright advises studying the IRS guidelines or talking to a tax consultant before going this route.
"With every tax situation, I think people need to read up on tax issues before they even meet with a financial adviser or tax planner," says Wright. "When you're sitting there with your iPad, take the time to get information -- that will help you and the tax preparer come to the best way to handle your particular situation." (See: "IRS and insurance rules for charitable car donations.")
He adds that you need to keep all receipts and related documents, just in case the IRS asks for proof. "The IRS requires that you keep careful records of your business travel, including the dates you used your car, the number of miles driven and the reason for the travel on business-related tasks," according to the American Institute of Certified Public Accountants' website, 360 Degrees of Financial Literacy.
When your vehicle is damaged or stolen: Wright also says that you may be able to claim a theft or casualty loss deduction if your car is stolen, damaged or totaled in an accident or by an act of nature, like getting smashed by a falling tree. But you can qualify for this write-off only if your auto insurance doesn't reimburse you for the full loss. (See: "5 commonly misunderstood car insurance terms.")
Also, the casualty and theft deduction has two limitations. For one, taxpayers can claim an individual loss only if it's at least $100. Next, even if your casualty or theft loss exceeds $100, you can claim the deduction only if the total amount you lost in the year is higher than 10 percent of your gross income. (See: "Something to hold on to: comprehensive and collision insurance.")
In calculating the loss that you want to claim, you'll have to subtract whatever reimbursement you received from an insurance company. Again, you'll need to retain all your documents, including police reports, if you plan to deduct theft losses.
Deducting car insurance deductibles: You may be able to write off your insurance deductible as part of a theft or casualty loss. But, once again, the amount would have to be at least $100 to claim it as a portion of your losses, with the total losses for the year adding up to more than 10 percent of your gross income.
Compare real rates and save real money
Copyright © 1998-2014 by Quinstreet, Inc. All Rights Reserved. Insurance licenses