The Internal Revenue Service allows you to deduct certain "itemized" expenses -- including charitable donations and mortgage interest -- or take the standard deduction from your gross income. You can deduct employee expenses as well (as long as your employer didn't reimburse you for them), the cost of insurance to your business, and health insurance premiums if you are self-employed. The cost of personal liability insurance, in most cases, is not deductible.
Liability insurance protects you from claims for accidents on your property or injuries caused by you or a member of your family (or your pet). It may also cover damages caused by your negligence in operating a vehicle. Most people don't carry personal liability coverage with a separate policy. Instead, they have liability coverage included in their homeowners or auto insurance. If someone suffers an injury on your property, and claims that you are at fault, then liability insurance settles the claim. The insurance covers the claimant's medical bills, your own legal fees, and the pain and suffering caused by the accident.
Homeowners and Personal Insurance
If you are a homeowner, the IRS allows you to deduct mortgage insurance premiums, as well as mortgage interest, points, and property taxes. You list these itemized deductions on Schedule A of your form 1040. However, hazard and liability insurance are non-deductible; you may not add them to the cost basis of your home or roll them into other itemized deductions.
Business and Self-Employment Deductions
In order to deduct liability insurance, the coverage must apply to your trade or business. If you are paying premiums on liability coverage for your retail store, suite of offices or fleet of drivers, you can deduct the expense on Schedule C, the form for calculating business profit or loss. If you are self-employed and carry liability insurance for protection in the course and scope of your work, you may also take a deduction.
If you run a business out of your home, you may be able to add riders (added coverages) to personal liability policies that will protect the business operations as well. In general, this is less expensive than buying a separate business liability policy. In addition, the premiums you pay that you can allocate to the business would serve as a valid business deduction.
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