Unfortunately, in most cases, you won’t be able to deduct your insurance premiums on your taxes, but there are certain cases in which you definitely should. Let us guide you through each major type of insurance to show you when you should expect to see some money back!
Auto Insurance and Tax Deductions
Did you know that if you’re a certain type of performing artist, armed forces reservists, or a state or local government official your car insurance is tax deductible? This is also true if you are self-employed. If you fall into one of the listed categories, you can also deduct your deductible if you filed a claim. Here’s what you can deduct in total:
- Premiums
- Deductible
- Depreciation
- Gas
- Oil
- Garage rent
- Lease payments
- Registration fees
- Licenses
- Tires
- Tolls
- Parking fees
Auto Insurance Tax Deduction Requirements
You can’t deduct your premiums and also deduct your car usage. You have to choose between one of the two formulas for your tax deductions:
1-Mileage Deduction: The standard mileage rate for transportation or travel expenses is 65.5 cents per mile for all miles of business use (business standard mileage rate) in 2023.
2. Vehicle Expenses Deduction: Car insurance is included in this, as well as the deductions in the list above.
If you opt for #2, you’ll need to itemize your deductions with receipts. It’s highly advisable to speak with your insurance agent if you are self-employed and use your car for business purposes. There are too many stories of drivers not being compensated for a claim because business-use nullified the personal lines car insurance contract.
Your insurer may require you to buy commercial auto insurance in order to give you coverage if you have an accident while driving for a work-related purpose.
You will need to file your car insurance expenses in a Schedule C or the Loss From a Business section.
What if I Use My Car for Personal Reasons Too?
You can only deduct the percentage of use that is for business reasons. So, if you use your car 70% of the time for business use, you can deduct 70% of your car insurance and other car related expenses.
Homeowners Insurance and Taxes
Generally speaking, if you own a home and live in it, you cannot file a deduction for your homeowners insurance. In some cases, if you have a home office (as a self-employed worker, not a remote employee), you may be able to deduct a portion of your insurance premiums. You also may be able to deduct part of it if you host through Airbnb.
If you own an investment property, which you rent out to tenants, you can deduct your full homeowners insurance payments for the year for that property, not the one you live in.
Renters Insurance and Taxes
Just as with home insurance, you cannot deduct your renters insurance from your taxes, unless you have a designated office and are self-employed (remote work doesn’t apply). If this is your case, you can only write off up to $1,500.
Make sure your renters insurance policy does not exclude business operations. If it does, you may need to buy a commercial policy or add an at-home business rider to your renters insurance.
Health Insurance and Taxes
You cannot claim health insurance from an employer on your taxes. However, if you buy private health insurance, you can claim them as medical expenses. You must file itemized deductions to do this, instead of choosing the standard deduction. Also, to be eligible, your health expenses must be at least 7.5% of your gross income.
There is also an income-based premium subsidy, also called an advance premium tax credit (APTC), for coverage bought through the Health Insurance Marketplace. Any premium reimbursed by an APTC can’t be deducted from taxes but the remaining portion can be deducted.
Medicare and Taxes
Premiums for Medicare Part B, C or D along with Medigap are tax deductible, but Part A is not if it is paid through Social Security (the majority of cases). You can also deduct any or all of your medical expenses that include bandages, bandaids, wheelchairs and more.
Commercial Insurance and Taxes
Of all the types of insurance people need, commercial or business insurance is the one that is always tax deductible! Insurance, along with other business expenses, can be deducted from your taxable income.
However, if you buy equipment, like a computer, that you use for your business and for personal use, you can only write off the percentage that you use for business.
What Business Expenses You Can’t Write Off on Taxes
- Premiums paid that help cover earnings lost to sickness or disability or life insurance
- Expenses to set up a self-insured reserve
- Policies that help secure a loan
Life Insurance and Taxes
Typically, life insurance premiums are not tax deductible. However, the IRS allows for an exclusion of the first $50,000 of group term life coverage offered by some small business owners.A small business can deduct the premiums paid on behalf of employees from taxes.
Further, business owners can deduct premiums for individual life insurance coverage on a key employee, if that executive reports the premium payment as taxable income.
Spouses required to buy life insurance as part of an alimony agreement may qualify for a tax deduction on their premiums.
Also, transferring ownership of a life insurance policy to a charitable organization can be written off.
Life insurance death proceeds paid out to beneficiaries are income tax-free. The death benefit may be taxed if the estate is large and/or if the state mandates an inheritance tax.
The cash value of permanent life insurance is not taxed while it remains within the policy as a cash value component. However, if you withdraw any of that cash value, you will pay taxes on it.
Insurance and Taxes FAQs
Are settled claims taxed?
Generally, you are not taxed on a claim payout, even if it’s substantial, because the payout is to cover expenses that will make you whole. It is not considered income.
Are life insurance settlements taxable?
Life insurance settlements are subject to estate taxes if the size of the insured’s estate is large. Also, the state where the insured and beneficiaries live may charge an estate or inheritance tax.
Are insurance lawsuit claims taxable?
Only punitive awards are taxable. What’s paid out to you to make you whole (to fix a car or home) is not taxed but if you’re awarded money for pain and suffering, that may or may not be taxable, depending on the court ruling.
Bonus: General Tax Filing Tips
- If you donate a vehicle to charity, you may be able to claim a charitable contribution deduction.
- If you primarily use your vehicle to drive yourself or a loved one for medical reasons, you may be able to deduct auto-related expenses on Schedule A under itemized medical expenses.
- You may be able to deduct personal property taxes on your vehicle on state and local taxes.
- You may be able to receive a tax credit for purchasing an electric or hybrid vehicle.
- You can claim a deduction for property taxes (up to $10,000) on the home you live in and you can claim 100% on the taxes on the home(s) you use as rental property.
- You can deduct mortgage points, if you bought any when you purchased the home.
- If you have a disabled household member and make improvements to your home to make it accessible to the handicapped, you may deduct the expenses as Medical and Dental Expenses, in the section Capital Expenses.
- If you have many medical expenses it’s advised that you itemize your deductions rather than taking the standard deduction. Other medical expenses include but are not limited to:
- Wheelchair
- Bandages
- Medical equipment
- Eye exams and glasses
- Hearing aids
- Nursing services
- Dental care
- Three things you can deduct from your taxes for your business: your rent, the interest on loans you took out for the business and taxes you pay for the business, even foreign taxes.
As you can see, some policy premiums, like business insurance policies, are tax deductible while others are only tax deductible in certain circumstances. While you may not be able to deduct all your insurance policies on your taxes, you may be able to save money on your insurance premiums by shopping around once a year to make sure you’re paying the lowest rates.
