Calculating and paying taxes is an important yet stressful matter that we need to deal with every year. However, it is also a great opportunity for you to receive the maximum tax refund you can get. So while you are gathering all your tax papers, you might be wondering if your home and auto insurance tax deductible? The answer is, it depends on how you use them.
Generally, you cannot deduct your home insurance premiums from your taxes. It is because the Internal Revenue Service or IRS considered Home Insurance as “non-deductible expenses”. But there are certain ways to claim a deduction. One is if you are a landlord and you rent out your house. Second, if you use part of your home as a working space.
How it works
If you are a landlord and you rent out our house
If you rent out your house and make it your business, you can deduct the rental property’s homeowners or your condo insurance from your taxes. This is because renting your house is also considered work. Why? Because the income you are getting from your rental house is taxable.
If you work from home
If you use a part of your house as your working space, like a room as your office, then you may be able to deduct a part of your home insurance premiums from your taxes. Now, here is how you can calculate it. You need to determine the square footage of the part of your home that you are using for your work. So, let’s say you are using 20% of your house for your working space, then the 20% of the amount you paid in premiums for the year will be deducted from your taxes.
Home Office Deduction: How It Works
There are certain conditions for deduction criteria to be met. You must be able to prove that you are using your home as your main office or place for your business. Now, what if you have your business located in a different place outside your house, but at the same time you also use your home just like how you use your other office. If that is the case, then you might qualify for a home office deduction.
Let’s set an example. You are conducting meetings with your clients, customers, or patients ( if you are in the medical field ) in your house. But also, you have a business in a different location. You can file for deduction of expenses for the area or portion of your house used solely for your business. These areas can be your studio, garage, a room in your house, or an entire floor. In a nutshell, if you regularly use the specific area of your house for your business regardless if you have other offices located in a different place, still you might be eligible to file a tax deduction.
Also, there are other home-related deductions that you can itemize on your tax return:
- Mortgage Interest Deduction – is a homeowners tax incentive. It is an itemized deduction that allows homeowners to count the interest they have paid on a loan that is related to the building.
- Property Tax Deduction – Each year you are allowed to deduct your property tax. It includes state and local sales taxes.
- Energy Efficiency Deduction – Every individual can claim this credit. First, the 10% of the cost of the qualified energy efficiency improvements. Second, is the amount of the residential energy property gained by the taxpayer within the year.
Casualty Loss and Theft Losses
Casualty Loss and theft loss deductions are temporarily unavailable. The tax cuts and Jobs Act or TCJA temporarily suspend the old rule for 2018 through 2025. But if the cause of the claim is due to COVID-19 and federally declared disaster, you are still eligible to file a claim. Also, the Taxpayer Certainty and Disaster Tax Relief Act greatly enhanced deductions for all eligible persons for now.
All losses are deductible if they are not covered by your insurance provider. For example, a tornado hits the area where you live. As a result, the United States’ president declared the peril as a federal disaster. Now, let’s say the tornado causes a car to crash on your house’s wall. So you file a claim and the contractor gives you a repair estimate of $6,000. However, your insurance company determines that they just need to pay $3,000. If that happens, the remaining $3,000 will fall under the personal casualty loss and deductible from your federal taxes. However, if the government didn’t declare that the peril is a federal disaster, then you cannot deduct the remaining $3,000 from your taxes.
Moreover, you can receive a tax deduction if your house or personal property received a loss or damage that is not covered by your home insurance. Earthquake and flood losses are one of the most uninsured losses that you may claim to lessen your taxes.
Tax breaks when coverage is denied after damage and theft
When your possessions and home were damaged and your insurer denied your claim, you can file for casualty loss on your taxes. However, according to the IRS, you can only file a claim after damage if it is caused by sudden or unexpected events. It should be unusual and not a regular thing that can happen every day.
Deductible casualty losses examples
- Volcanic eruption
- Relocation or demolition of homes ordered from the government if the area is unsafe
Non-deductible casualty losses
- Wear and tear
- Damages caused by shrubs, fungus, and insect infestation
- Damages caused by pets and negligence
If you are using your car just for personal use, you can’t deduct anything on your tax return, just like in Home Insurance. However, if you are using your car for business purposes like for deliveries of business supplies and using it to meet the clients, then you might be eligible for reducing your tax.
Also, you may get qualified for deduction if first, you are just an employee and you are using your can for the business. But, your employer has no intention to reimburse the expenses you use for the car during business hours. Secondly, if you are self-employed and you are using your car for business purposes.
Also, auto-related expenses during the use of the car while in business. These are gas expenses, parking, and repairs. But for these to be valid the auto-related expenses should be more than 2% of your AGI or Adjusted Gross Income. So let’s say your annual AGI is $50,000, you must have a minimum of 2% of $50,000 which is $1,000 or more. Because if the auto-related costs don’t meet the minimum 2%, then you will not be qualified for the claim.
P.S. If you have reached 2% or more and are eligible for deductions, you need to provide valid proof like receipts with time and costs to back up your claim.
Factors to qualify a deduction for a totaled car
- The accident that caused the damage must not be due to negligence.
- The cost of the damage must be more than 10% of your AGI.
- You must file an auto insurance claim.
- Your insurer can’t fully reimburse the total loss. But, if the cost of the damage to your car exceeds your insurance limit then you might deduct the remaining amount left and the deductible cost.
What to do if you are using your car for both business and personal use
You can still deduct your insurance costs for your taxes even if you are using your car for personal use and business at the same time. You just need to calculate the percentage of the time you use your car for business to determine how much you are going to file for the deductions. Let’s set an example, you are using your car to drop off and pick up your children from school. It only took 20% of your day to do that, the remaining 80% can be deducted from the yearly auto insurance costs of your taxes.
Another example is if you are an employee. You are using your car mainly for personal use but your employer sometimes asks you to go on a business trip or meetings. The cost of insurance that you spent driving for sudden business trips is deductible. It also includes all the expenses like gas, parking fees, and any other auto-related expenses. However, if your employer already reimburses the costs of the trips, then there’s no need for deductions.
Using your car if you rent your house or own an Airbnb
Owning a rental house or Airbnb needs you to drive to manage your business. If that is the case, all travel expenses related to the upkeep of your business homes are tax-deductible. So if you are going to use your car to meet a guest or drive for the regular check-ins and maintenance, those are eligible for deductions.
But remember, you need to meet the minimum of 2% or more for you to be able to file for deductions. Therefore, if you are just using your car every once in a while and didn’t meet the minimum required percentage then you are not qualified for a tax deduction.
Now, some states require rideshare insurance. If you happen to be living in those states, you can deduct the entire premium for that specific coverage from your taxes.
Overall, saving some money while we can is a must. Therefore we should always take advantage in all the possible ways we can. Contact us today! We work with the best insurance companies in Denver, Colorado, and the rest of the country.