The best protection from unexpected events is insurance; for the cost of an affordable premium you can obtain sizable benefits in case of loss. You may have a variety of policies for different purposes. Premiums can be high, but some may be tax deductible.
Important: Don’t confuse the deductible on the policy (the amount you pay out-of-pocket before insurance kicks in) with a tax deduction for the premiums. The first is an insurance term; the latter is strictly for tax purposes.
If you itemize your medical expenses, you can deduct any insurance premiums for health coverage. This can include:
- Comprehensive policies, such as Blue Cross Blue Shield
- Content lens replacement insurance
- Long-term care insurance (within limits tied to your current age)
- Medicare Part B for doctors fees (and Medicare Part A for hospital costs for those not otherwise covered by Medicare)
- Medicare Part D for prescription drug coverage
If you have a business, then any business-related coverage is deductible. This can include:
- Auto insurance on a company car. If you use your car for business and deduct business-related car usage using the actual expense method (rather than the IRS standard mileage rate), you can deduct the portion of insurance related to business use.
- Business owner’s policy (BOP) to cover business property and liability exposure.
- Business interruption to pay expenses and cover profits during a period in which business is shut down due to storms or other occurrences.
- Directors and officers policy to cover errors and omissions while performing duties in these roles.
- Employee-related coverage, including workers’ compensation and unemployment insurance, if your business has any employees.
- Homeowner’s insurance for home-based businesses. Deduct only the portion of the premiums related to business use of the home.
- Key person life insurance policies where the business pays premiums for coverage on the life of the owner or other key person.
- Professional liability coverage (malpractice) to cover errors and omissions in a professional capacity.
Not all insurance premiums will warrant a tax deduction. Nondeductible coverage may include:
- Auto insurance (except for business usage explained earlier).
- Disability to provide benefits if you cannot work.
- Homeowner’s or renter’s insurance (except to the extent of any business use of the home).
- Life insurance to protect your family.
- Specialty insurance, such as coverage for weddings, boats, pets, and travel.
- Title insurance for homeowners. Note: The cost of this coverage is added to the basis of the home, which will lower the amount of gain when the home is sold.