Answers to your tax questions in this guest post by Brian O’Connor, a freelance personal finance writer:
Can you ever deduct your homeowners or auto insurance premiums? And could you end up owing tax on an insurance payout?
The general answer is “No,” but like anything that involves taxes, the real answer is “It depends.”
“As a general rule, personal expenses are not deductible under the tax code,” says Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting practice. “If you use part of the home as a home office or rent out part and get rental income, then you can allocate a portion of the insurance cost to that business activity and it’s deductible against your business income.”
The same goes with your auto insurance payments. If you use your car for business or in a side gig, you can deduct some of that cost. The easy way on auto is to just claim the IRS mileage allotment of 54 cents per mile (you can do that with miles driven for charity work, too). That number covers gas, maintenance, insurance and other car expenses.
On your home, you can take $5 per square foot for your home office. That amount is likewise calculated to cover all your costs of home ownership, including insurance.
Or you go the complicated route, add up all your real expenses and then deduct them to the extent that your home or car was used for business. If it was 20 percent of the time, you can write off 20 percent of those costs.
In terms of an insurance payment, it typically won’t be taxable, unless you make a huge profit beyond what you paid for the property that was damaged, stolen or destroyed. And if an insurance payment fails to cover your total loss? It’s a stretch but you take a big enough hit, you might have a deduction.
“You really have to be talking about a pretty big loss before you can write anything off,” explains Barbara Weltman, contributing editor of J.K. Lasser’s Your Income Tax 2017.
More information on tax filing and insurance from the I.I.I. website.