In unusual mid-year move, IRS increases standard mileage deduction
The Internal Revenue Service (IRS) made an unusual announcement on June 9, increasing the optional standard mileage rate for the last six months of 2022. The move comes as sky-high gasoline prices continue across the country .
The IRS has not changed the mid-year mileage rate since 2011. Typically, these increases are enacted in the fall, for the following tax year. This increase will take effect on July 1, 2022.
Under the new rate, the amount individuals can spend on business will increase from 58.5 cents per thousand to 62.5 cents per mile. That’s a 4 cent increase from January 2022 rate of 58.5 centsand from 56 cents per mile in January 2021.
The rate for medical or moving trips also increased from 18 cents per mile to 22 cents per mile.
The charitable mileage rate has not changed. It is set by law and remains at 14% per mile.
A “special measure” to help taxpayers
The increase is intended to “better reflect the recent increase in fuel prices,” IRS Commissioner Chuck Rettig said in a statement. Press release dated June 9. The IRS is “taking this special action to help taxpayers, businesses and others who use this rate,” Rettig said.
Consumers may be disappointed with the 4 cent increase. The national average price of gasoline is a dollar higher than it was in January, from $3.31 (January 18, 2022) at $4,842 (July 1, 2022). The average gasoline price in California on July 1 was $6.27.
Who is eligible
Until 2018, employees could deduct mileage and other unreimbursed business expenses if those expenses exceeded more than 2% of their adjusted gross income. The Tax Cuts and Jobs Act of 2017 (TCJA) – which also reduced tax rates and doubled the standard deduction – suspended most of these deductions.
The standard mileage deduction is now limited primarily to small business owners and the self-employed. This includes independent contractors, such as drivers for ride-sharing services, says HR Block.
Other people who can take advantage of the standard mileage deduction are qualified performing artists, armed forces reservists, paying civil servants, and people with mental or physical disabilities. who pay attendant care costs at their workplace.
Additionally, mileage deductions may be taken for medical or volunteer travel.
The moving deduction remains for the military
The TCJA also eliminated the standard mileage deduction for travel due to travel across the country for employment. Before 2018, if your employer did not reimburse you for travel expenses, a standard mileage deduction could be applied.
However, this deduction remains in effect for serving military personnel who change position.
Companies are not required by the federal government to reimburse employees for mileage, although state laws vary. In this case, the employer can set the amount of the reimbursement. However, says Daily Business Newsif an employer’s reimbursement rate is higher than the IRS’s 62.5 cents, a portion of the reimbursement could be considered compensation and would be subject to taxes.
What is a company vehicle?
A vehicle must be used for commercial activities to qualify for the mileage rate deduction. It can be a car, SUV or truck. Commercial vehicles that are dump trucks or vehicles used for rental, such as hotel shuttles, are not eligible for the mileage rate deduction. But some taxi drivers, as well as drivers of services like Uber and Lyft, are eligible because the drivers are self-employed.
The mileage deduction adds up
A self-employed person can deduct mileage on personal cars used for business. Although you cannot deduct trips to the office, you can deduct other business trips.
If you deduct this mileage, the IRS requires a log with date and activity. This log should include dates, destinations, reason for travel and mileage.
It may be worth keeping records. Deducting this mileage can add up. For example, if you’re in sales or an Uber driver and drive 10,000 miles for the remainder of 2022, at the new rate of 62.5 cents, your deduction would be $6,250. It is important. here is a calculator to help you determine your mileage deduction.
You can only deduct business mileage. Personal mileage is not eligible. Also note that you must detail your tax return to benefit from this deduction.
Deduction of actual expenses
The change in the IRS mileage rate does not affect the actual expense deduction, an alternative to the mileage deduction.
When using the actual expense method, a driver adds up all vehicle expenses. This includes loan interest payments, lease payments, insurance and oil changes. Detailed record keeping, with receipts, is required.
Once these are added together, they are multiplied by the percentage of business used. So, for example, if you used your vehicle for business purposes 50% of the time and your expenses were $8,000, your deduction would be $4,000.
Depending on the year, these two methods may produce different results. Turbotax advises drivers to keep records for both methods each year and compare the results.
If you wish to use the standard mileage rate method, be aware that you must do so within the first the year you use your car for business purposes. In later years, however, you can choose either method.
Compare deduction results
Run the numbers when choosing to use a standard mileage deduction or an actual expense deduction. Depending on the year, these two methods may produce different results. Turbotax advises drivers to keep records for both methods each year and compare the results at tax time.
If you wish to use the standard mileage rate method, be aware that you must do so within the first the year you use your car for business purposes. In later years, however, you can choose either method. It follows that if you choose the actual expense method in the first reporting year, you must continue with the actual expense deduction for as long as you own the vehicle.
If you choose the standard mileage deduction on a leased vehicle, you will be locked into this method until the end of the lease.
Key points to remember
Due to rising gasoline prices, the IRS increased the standard mileage rate deduction to 62.5 cents per mile.
While the increase lags far behind actual increases in gas prices, it still represents a potentially big savings for many drivers, especially the self-employed. If you’re considering taking an actual expense deduction instead, analyze the numbers to see which method will save you the most at tax time.
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