When buying a car, whether new, used or pre-owned, we must take into account a series of new economic responsibilities that we must fulfill. Among these commitments we find the purchase of insurance and the payment of taxes. Today we will guide you so that you know how taxes work in your auto insurance.
What is the tax deduction?
Before you start, do you know what a tax deduction means?
Well, the so-called tax deduction is a reduction in the total amount of taxes that a person or organization must pay.
Deductions are understood as those expenses that we incur as taxpayers, and that are essential to carry out our professional activity or that are accepted as deductible by the tax authority. When these expenses can be deducted, they decrease our profit or profit, and therefore the taxable base is also decreased.
What taxes does my auto insurance have?
All auto insurance includes value added tax or VAT. The amount of the tax depends on the rate in force in the area in which the insurance is purchased. For example, as of August 2021, the VAT rate is 16% throughout the country, except in the northern border strip, where it is 8% for 4 years thanks to a fiscal stimulus for both areas.
Thus, your auto insurance is classified as a company service provision policy, for which your auto insurance is taxed with VAT.
Can I deduct my auto insurance?
To determine whether or not you have tax benefits when acquiring car insurance, it is necessary to know what type of person you are, that is, if you are a natural or legal person and what activity you do.
Individuals with income from wages (wage earners)
If you are a natural person with income from wages, then your auto insurance is not tax deductible. You will also not be able to deduct the VAT you pay for said insurance.
This is unlike medical expenses insurance and life insurance, which can be deducted from taxes as a salaried individual.
Individuals with business activity
If you are a natural person with a business activity, and you need the car to fulfill the activities that generate your income, then you can deduct the car insurance and credit the VAT you paid on it.
In many cases it is recommended to lease the vehicle to be able to deduct the monthly payment of the lease in addition to the auto insurance.
Individuals with activities on digital platforms
If you are a natural person with activity on digital platforms such as Uber and DiDi, you can deduct the cost of insurance and credit the VAT you paid, since insurance is essential for you to carry out your economic activity.
In general, it can be considered that legal entities can deduct auto insurance, but we recommend consulting a certified accountant to obtain an opinion that depends on each case.