Q

Is renters insurance tax deductible?

A

Renters insurance is not tax deductible unless a room in your insured rental is used exclusively to conduct business.

Zack SigelKara McGinley

Zack Sigel & Kara McGinley

Published January 23, 2020

KEY TAKEAWAYS

  • You typically cannot write off your renters insurance premiums on your taxes

  • However, if you have an at home office that you use only for business purposes, your renters insurance premiums might be tax-deductible. The maximum amount you are allowed to write off is typically $1,500

  • Some renters insurance policies exclude coverage for an at-home business, so you should talk to your insurance provider about adding a home business endorsement or rider to your policy

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. Renters insurance covers perils like fire, smoke, lighting, windstorm, hail, vandalism, theft, and more

Most people don’t pay more than $10 to $20 per month for a basic renters insurance policy, but that can add up. You may wonder whether you can deduct that amount from your taxes the way you can sometimes deduct your health insurance premiums. 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.

In this article:

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.

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. If you earn $50,000, and you claim $1,000 in deductions, that doesn’t mean you pay $1,000 less in taxes, but it does mean that you only need to pay taxes on the $49,000 in remaining income.

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.

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. This means if you work at the desk in your bedroom, you cannot claim a tax deduction — the space can only be used for work. If this is your situation, 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.

To be clear, if the room has literally 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

The only time you can deduct your renters insurance premiums from your taxes is if you have a specified home office or at-home business.

Deducting renters insurance premiums

To calculate how much of your home office business expenses can be claimed as a deduction, you have two options: the standard method and the simplified method.

  • 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.

If your home office is 100 square feet, you can write off up to $500 in business expenses, including your renters insurance premiums. (The maximum allowed is $1,500, or 300 square feet.) You report this information on Schedule C to your Form 1040.

  • The standard method: 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.

If you paid $100 in renters insurance premiums, and your home office takes up 20% of your entire house, you can claim $20 of those premiums as business expense deductions. You need to fill out the IRS Form 8829 if claiming a business expense using the standard computation.

However, if you do have an at-home business, often times a basic renters insurance policy won’t cover all the expensive equipment that you use in your office.

Adding an at-home business rider

If you make more than $2,000 a year at an at-home business, you should consider adding an at-home business rider to your renters insurance policy. For example, if your home office has multiple computers that exceed your basic renters policy’s computer sublimit of say $2,000, you should schedule a rider to protect them.

You can think of at-home business riders as extra insurance coverage for the things you need to make a living. Most renters insurance companies allow you to add additional coverage at any time, so this means if you decide to start a business out of your home and already have a renters policy, you can easily just add a rider for your at-home business.

You can also ask your insurer for a “business property endorsement” or “home business endorsement” to extend coverage to business property. So that 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.

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When renters insurance is not tax deductible

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. If you work from home but don’t have a room designated as an office (and an office only) then 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 the home office 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 excludes business expenses

The IRS instructions for deducting insurance premiums are contained in Chapter 6 of Publication 535. There you’ll find that, 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).

But there’s another document you need to look at: your actual renters insurance policy. Most renters insurance policies actually exclude coverage for the part of your home used for business. Check the policy’s definition for “insured location” or “residence premises” and you’ll usually find the exclusion there. That means your renters insurance does not cover your business property, and, per the tax code, your premiums are not deductible.

To make sure your renters insurance is “related to your trade or business”, you may need to add a rider to your policy. Additionally, some renters insurance policies that otherwise exclude coverage for business may include some coverage for business property under their section for special limits of liability. This usually means a few thousand dollars in coverage for property used for business expenses both located in your home and away from it.

A tax expert can tell you whether this small amount of business property coverage is enough to deduct your renters insurance premiums on your tax return, and a licensed representative at Policygenius can make sure you’re getting the right renters insurance policy for your needs, including any riders you want to add.