Top 4 insurance tax deductions this season - and how to avoid them
It's crunch time for American taxpayers, as April 15 approaches fast.
Millions of people racing to meet the annual tax deadline are looking for every possible way to trim their bill, especially by increasing their deductions.
Sometimes, the best way to save is to think outside of the box. Following are four overlooked ways you can save that are tied to your insurance policies.
1. Losses not reimbursed by property insurance.
If you're underinsured and suffer a big loss, your wallet will take a corresponding hit.
But you can ease the pain a bit come tax time, says Lynne McChristian, Florida representative for the Insurance Information Institute.
"Generally, you can deduct property losses that weren't reimbursed by insurance," she says.
Unreimbursed damage to your home, car or boat all may qualify and these property / casualty losses show up as itemized deductions on your tax return.
An unreimbursed loss that exceeds 10 percent of a homeowner's adjusted gross income typically can be deducted, less $100, according to the Insurance Information Institute III).
You'll have to substantiate the damage with receipts, insurance statements, police reports and other documentation.
Bring this information to your tax preparer, who can tell you whether the losses qualify for a tax break.
Although this deduction can take some of the sting out of an unreimbursed loss, McChristian says that it's no substitute for being properly insured.
2. Health insurance premiums.
If you're self-employed, you can deduct your health insurance premium.
This deduction may also apply to dental and qualified long-term care insurance premiums, says Charlie Harriman, a financial adviser and certified estate planner at Cloud Financial in Huntsville, Ala.
Qualified long-term care insurance premiums must meet several conditions laid out by the IRS. Find out more at the IRS website.
This is considered an adjustment to your income, so you can take the deduction even if you don't itemize on your return.
You can deduct premiums for yourself, a spouse and dependents.
Deductions for long-term care insurance are determined by age. For example, you can deduct the following amounts on your 2014 return:
- $370 if you are 40 or younger.
- $700 for ages 41 to 50.
- $1,400 for ages 51 to 60.
- $3,720 for ages 61 to 69.
- $4,660 for those 70 and older.
Any tax deduction you take for health insurance premiums can't exceed the amount you earned in income.
People who aren't self-employed also may be eligible to deduct their premium costs, but only in certain situations, says Gregory Stratoti, a certified public accountant and partner at Wipfli CPA and Consultants in Media, Pa.
"Health insurance premiums are added to other deductible medical expenses in determining whether they are deductible as itemized deductions," he says.
If your total qualified medical expenses exceed 10 percent of their adjusted gross income 7.5 percent if you or your spouse were age 65 or older as of Dec. 31, 2014), you can take the deduction.
3. Auto insurance premiums if you drive for business.
If you own a small business and drive your car for work-related reasons, you may have a deduction related to use of the vehicle.
People who take this type of deduction have two options:
- Deduct the actual automobile costs -- including gasoline, maintenance and car insurance -- they incur in a given year.
- Deduct the number of business miles they drive in a year. For 2014, the federal government reimbursed drivers at a rate of 56 cents per mile driven.
If you deduct actual costs, you get a break on your insurance premiums.
"Any insurance purchased for vehicles used in business that cover liability, damages and losses is deductible," Harriman says.
Generally, you can deduct the full amount of your premium, Harriman says.
However, "If you're using the standard mileage rate, then you can't deduct any car insurance premiums," he says.
Consult your tax preparer to find out which option makes most sense for you.
Stratoti notes that you can only deduct the percentage of your premium that was used to insure the car when you used it for business purposes.
"If a taxpayer uses the car 70 percent for business, then 70 percent of the auto insurance will be deductible," Stratoti says. "The 30 percent representing personal use isn't deductible."
The IRS suggests that you document your business trips with a logbook that records the mileage you drive, the date of your trip and your destination.
4. Homeowners insurance premiums on rental properties.
If you own a rental property -- even if it formerly was your principal residence -- you can deduct the insurance premiums that you pay for your coverage.
"Insurance on rental property is generally fully deductible against rental income," Stratoti says.
He says such a deduction isn't difficult to prove. Just make sure you have evidence that you purchased the coverage, such as a receipt.
What happens if you lived in a property for the first six months of the year, then rented it out for the remainder of 2014?
You can still deduct some of the cost of your insurance premiums but "you must divide the expenses between rental and personal use," Harriman says.
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