Is Car Insurance Tax Deductible? | What You Need to Know

January, 09 2025 by Steve Banner, EA, MBA

Yes, car insurance is tax deductible for self-employed taxpayers who use their car for business purposes. It is also tax deductible for Armed Forces reservists, qualified performing artists, and some government officials. So, despite economic inflation and the cost of car insurance and everything else going up, you’re in luck if you fall into one of these categories above.

The final amount you can deduct on your tax return for car insurance depends on how much you use your car for business purposes, and how much you use it for personal purposes. The IRS expects you to keep records of your mileage for business use of your car and, at the end of the year, this will allow you to calculate the percentage of your use of the car for business purposes.

Example: Joanne uses her own car almost every day in her work as a self-employed sales representative for a manufacturer of make-up and cosmetics. At the end of 2024, she reviewed her mileage logbook and found that she had driven her pink Cadillac a total of 20,000 miles for the year, of which 8,400 miles were for business. She divides her business miles by her total miles (8,400 divided by 20,000) and calculates that her business use of the car for the year was 42%. Joanne can now claim a deduction for 42% of the costs of running her car for the year.

Continuing with our example of Joanne, taxpayers like her can choose between two different methods of claiming their car expenses deduction, namely:
 

• Standard mileage method
• Actual expenses method

Standard Mileage Rate

This method is quite simple and easy to use for Joanne as she just multiplies her number of business miles by the standard rate of 67 cents to calculate her deduction i.e. 8,400 * 0.67 = $563.

The standard rate is set annually by the IRS, and it is intended to cover all of the following costs related to a vehicle:

As you can see from the above table, Joanne’s deduction amount of $563 includes insurance in addition to other types of costs related to operating her car for the year. But given that Joanne’s car has a fuel-thirsty V8 engine, she may be better off to explore the Actual Expenses method to calculate her deduction.

 

Actual Expenses Method

This method calls for more work on Joanne’s part as she must keep records of all of her car-related expenses for the year – including insurance. These expenses include:

 

When she adds up the total of all of these expenses at the end of the year, Joanne multiplies this total by her business use proportion of 42% to calculate the allowable deduction for her car. This method would seem to be the best one for Joanne to use because of the high fuel consumption of the type of car she drives. In the same way, if her insurance premiums were suddenly increased by the insurance company, the actual expense method would allow her to deduct 42% of the increase.


Joanne’s Choice

The actual expense method would give Joanne a deduction amount that more accurately reflects her out-of-pocket costs, rather than the standard method with its one-size-fits-all approach. Although we mentioned that taxpayers can choose either method to calculate their deduction, there are certain rules that apply from one year to the next.

If Joanne used the standard rate for the first year she used the car for business, she can choose to use either standard or actual in each of the following years. But if she used the actual method in the first year, she must always use the actual method in each year that follows.

Finally, it is important for Joanne and anyone else who plans to deduct insurance and other car expenses to keep accurate and contemporaneous mileage logs, as well as receipts, for their car expenses. This is a frequently audited deduction and, without good documentation, the amount claimed will not likely be allowed.