Renters insurance protects you from the financial risk of losing your personal property, being liable for someone’s injury, or needing alternative housing accommodations when you live in a home you rent. Like other forms of insurance, you pay for renters insurance with premiums, monthly or annual payments that are calculated as a function of your coverage needs and location. But, under most circumstances, renters insurance premiums can’t be deducted from your taxes.
The one exception under which you can deduct renters insurance is if you use a room in your rental property as your home office.
But what constitutes a home office is strictly defined by the IRS, so even if you run your own business out of your home, you may not qualify for the deduction.
What is a tax deduction?
Every year, you pay taxes on your taxable income, an amount that comprises your wages, salary, and tips minus a nearly endless selection of potential credits and deductions. (Or just the standard deduction, whichever is greater.) Your tax liability is a percentage of your taxable income within each range of increasingly larger tax brackets. Here’s how the tax bracket changes affect your wallet.
SPONSORED: Find a Qualified Financial Advisor
1. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.
2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you're ready to be matched with local advisors that can help you achieve your financial goals get started now.
Deductions have to be itemized on a separate form of your tax return, which breaks them up into categories related to each expense. When you claim a deduction, you’re not exactly subtracting the amount from your taxes; you simply report less income that you’re obligated to pay taxes on.
How tax deductions work with renters insurance
For most types of insurance products, including life insurance and disability insurance, you can’t deduct your premiums from your taxes. You can claim a deduction for health insurance premiums if you paid for your coverage with after-tax dollars, but that’s one of the few exceptions. (Here’s a list of deductions you can no longer claim on your tax return.)
Renters insurance is another exception. You can claim a tax deduction on renters insurance premiums, but only if you work from home and have a room in your house that you use only as an office. In that case, renters insurance counts as a business expense, and business expenses can be claimed as deductions.
To be clear, there’s no section on your tax return that says “renters insurance deduction.” But when claiming business expenses, if your business is principally run out of your home office, you’ll be able to deduct your renters insurance premiums.
But if the room has any other function, you can’t write off business expenses related to it. You can’t deduct any business expenses that arise out of the use of your living room, dining room, or bedroom.
When renters insurance is tax-deductible
To calculate how much of your home office business expenses can be claimed as a deduction, you have two options: the regular method and the simplified method.
- The simplified method involves measuring the area of your home office and multiplying by 5. The result is the total dollar amount you’re allowed to deduct.
- The standard method uses the area of your home office in square feet divided by the total area of your home. Add your expenses together and multiply the result by the percentage your home office takes up of your home.
When you can’t deduct renters insurance
For most people, renters insurance isn’t tax-deductible. Others won’t need to itemize their deductions at all, if the standard deduction exceeds the amount they’re eligible to deduct.
- You don’t use your home for business. If you don’t have a home office, your renters insurance premiums aren’t tax-deductible.
- You’re a W-2 employee. Most people use their home office when they run their own business. But if you’re an employee of someone else’s company, you can only deduct business expenses related to your home office if you’re using it for the convenience of your employer and you’re not renting any part of your home to your employer for the purposes of performing your job duties.
- Your renters insurance doesn’t cover business expenses. As long as the coverage is “related to your trade or business”, you can deduct premiums for insurance “that covers fire, storm, theft, accident, or similar losses.” That generally describes renters insurance (as well as homeowners and condo insurance). Most renters insurance policies actually exclude coverage for the part of your home used for business.
To make sure your renters insurance is “related to your trade or business”, you may need to add a rider to your policy. Ask your insurer for a “business property endorsement” or “home business endorsement” to extend coverage to business property. Not only will you be reimbursed for a loss to your business property; you’ll also be able to write off some of your premiums.
Interested in renting? Learn which cities have the smartest renters.
This article originally appeared on Policygenius and was syndicated by MediaFeed.org.
Featured Image Credit: DepositPhotos.com.