When it’s time to file your taxes, you start to think about every way possible to save! You try to consider every possible write off of course and insurance costs are no exception.
So, can you deduct your insurance premiums for tax purposes? Well, the main question to ask here is simply about the nature of the insurance policy and whether the insurance cost for personal or business
A personal policy is usually considered a personal expense by the IRS and therefore non deductible for tax purposes. However, there is always a nuance here when it comes to sole proprietorships as there is a percentage use for business and a percentage for personal. So it is important to discuss this with your bookkeeper and tax specialist to amke sure the business use percentage is accounted for as it might qualify you for a tax deduction.
How to deduct your insurance premiums:
First, keep in mind that in order to deduct any insurance premiums for taxes, you must fill out the Complete Form 1040, not the abbreviated 1040 A or 1040 EZ. You’ll also have to file Schedule C Profit or Loss From Business. Then, you need to decide how you’re going to claim your insurance premiums as you have the option of using a simplified method or calculating your actual insurance expenditure.
- Auto insurance premiums: The IRS allows for a simplified method of deducting the business use of your car or other vehicles, the dollar amount per mile is usually updated annually so make sure to check the current rate. This amount is designed to cover repairs, gas, depreciation … etc .To take your actual expenses, you must calculate the percentage of total car costs for the year based on the number of total miles driven vs. miles driven for business.
- Homeowner’s insurance premiums: the simplified home office deduction is $5 per square foot for the space that’s dedicated only to office use, up to a maximum of 300 square feet, or $1,500. These numbers could be updated each tax year, so make sure to check for the latest figures on the IRS website. You could go the extra step and add up all your home-related expenses including the mortgage payments, maintenance, property tax, insurance, utilities and so on … and then deduct the percentage of total space in the home occupied by the home office space. However, this method requires that you keep track of your expenses in detail. So a good bookkeeping system is a must.
Are claim payments taxable?
If you a file a claim and receive a payout from insurance company as the claim settlement, whether it is a car accident or a home loss, you may be wondering whether that payment is taxable. Generally speaking, the answer is no. However, if there is a gap between what your insurer paid out and your actual financial damage, you might be able to take a deduction for the loss. Deductions on the Casualties and Thefts schedule can be written off only to the extent that they exceed 10 percent of your adjusted gross income, minus $100 and any insurance payments. So make sure to discuss this with your tax specialist to see the best way to benefit from this deduction especially if this is a business loss.
These are both fairly rare and complex situations that should be reviewed with a financial professional.
Credit: Insurance Information Institute