IRS Increases Standard Mileage Rates
The Internal Revenue Service (IRS) recently announced an increase in the standard mileage rate for the final six months of 2022, due to gas prices being at an all-time high. This move is seen as a way of cushioning the blow. (Great news for folks who are claiming a mileage deduction when filing 2022 income taxes in 2023!)
The standard mileage rate for business use of vehicles will be 62.5 cents per mile beginning July 1 and ending December 31, 2022, up 4 cents from the 58.5 cents per mile rate in effect for the first six months of the year, according to IRS Announcement 2022-13. The EPA normally adjusts mileage rates once a year in the fall for the next calendar year, so rates set in the fall of 2021 will be effective throughout 2022. Taxpayers should apply the original 2022 rates for travel from January 1 to June 30, 2022, and the recently announced rates for travel from July 1 to December 31, 2022.
Why the Increase?
A Rise in Demand Compared to Available Supply
The increase comes at a time when driving costs such as fuel have reached record highs. Inflation is affecting repair and maintenance costs, and supply chain challenges continue to drive up the cost of new and used vehicles. As you know, the price of gasoline has been hovering around $5 a gallon for quite some time due to a supply-demand imbalance.
There are four key reasons for this rising demand:
- War in Ukraine has caused supply interruptions
- Annual hurricane and tornado devastation has resulted in weather extremes
- Summer travel is on the rise
While other regional and national factors play a role, these four are the main drivers of higher gasoline prices and, as a result, higher mileage rates.
How the Rate is Used:
As an alternative to recording real expenses, this rate is used to determine the deductible costs of operating a vehicle for business purposes.
Employers often use the standard mileage rate—also known as the ‘safe harbor rate’—to offer tax-free reimbursements to employees who use their personal cars, vans, or trucks to conduct business for their employers in addition to the individual tax deduction.
While fuel costs play a substantial role in mileage calculations, other costs, like depreciation, insurance, and other fixed and variable costs, also play a role.
For 2022, the IRS set the standard mileage rate that is recognized as depreciation at 26 cents per mile for cars used for business.
Changes in Mileage Rates Through 2022
Standard mileage rates for cars, vans, pickup trucks, and panel vehicles will be as follows for the final six months of 2022:
Costs of Fuel and Other Items
According to IRS Commissioner Chuck Rettig, "the IRS is changing the regular mileage rates to better reflect the recent increase in fuel prices." "We are aware that a variety of exceptional issues relating to gasoline costs have come into play, and we are taking this extraordinary action to assist taxpayers, businesses, and others that utilize this rate."
Because July and August are the busiest driving months in the United States, this news arrives at a good time. The Department of Labor stated on June 10 that gasoline prices were up 48.7% year over year in May in its monthly consumer price index report.
Common Business Vehicle Tax Deductions
As mentioned above, any self-employed person who makes deliveries, drives to a client's location, or otherwise uses their own vehicle for work-related purposes can claim tax deductions for business use of a personal vehicle (your car, van, or truck)
There are some other tax deductible business expenses you can claim on your vehicle. To calculate the deduction, you can either use the standard mileage rates mentioned above or your actual car expenses.
Tally up all your car-related expenses for the year. Here are some:
- Lease payments
Then, multiply the amount by the proportion of total miles traveled for business purposes that year.
For example, if your total annual car costs are $5,000 and you drive for business 20% of the time, you can deduct $1,000 ($5,000 x.2).
1. Military Personnel Moving Expenses Can Be Deducted From Taxes!
Previously, you could deduct job-related moving expenses if your new position was at least 50 miles away from your previous one.
The moving expenditure deduction was repealed by the 2017 tax reform law, with one major exception: if you're a member of the US Armed Forces, the cost of any transfer connected with a permanent change of station is still deductible if the relocation was pursuant to a military order.
This benefit for military families covers moving from your home to your initial post of active duty, moving from one permanent post of duty to another, and moving from one permanent post of duty to another. The costs of moving yourself and your belongings to a new location that were not paid can be deducted. If you drive your own car, use the above mileage rates plus what you paid for parking and tolls for a move. When it's time to file your tax return, use Form 3903 to figure out how much you spent on moving.
2. Medical Travel Can Be Deducted From Taxes
Unreimbursed medical expenses that exceed 7.5 percent of your federal adjusted gross income can be deducted if you itemize deductions on your tax return. The list of medical expenses that qualify for the deduction is long, and it includes obvious costs like:
- Doctor Bills
- Blood Tests
- Dental Treatment
- Nursing Care
It also covers the cost of transportation, which is largely needed and necessary for medical treatment.
You can deduct actual out-of-pocket expenses like gas and oil if you drive your own car for medical reasons, but you can't deduct depreciation, insurance, general repair, or maintenance costs. You can choose to utilize the normal medical mileage rates above instead of your actual expenses, just like you can with the deduction for business use of your car. You can charge parking fees and tolls in either case.
Expenses you can't deduct, according to the IRS, include:
- Even if a medical condition necessitates an unconventional mode of transportation, getting to and from work
- Travel to another city for strictly personal reasons, such as an operation or other medical treatment
- Travel that is only for the purpose of improving your overall health
- The costs of driving a specially outfitted vehicle for reasons other than medical
3. Use of a Car for Charitable Purposes Is Tax Deductible
Most people are aware of the charitable tax deductions available to itemizers, but there is one feature of the deduction that is sometimes missed.
You can deduct out-of-pocket costs paid while working for a charity in addition to cash donations or underutilized things in your home.
This includes the costs of:
- If you use your own vehicle to bring food and supplies to a charity organization's soup kitchen (for example, you can deduct your transportation expenses)
You can track your actual costs or use the standard mileage rate to determine your deduction, just like the other car-related expenses mentioned above.
Don't forget to include the pricing as well!
A strategy that has gained traction with employers across the country: the fixed and variable rate reimbursement, often referred to as FAVR.
The IRS rate is best for low-mileage drivers who travel less than 5,000 business miles per year.
Instead of the standard mileage rate, Notice 2022-03 provided maximum vehicle expenses when using a Fixed and Variable Rate (FAVR) allowance plan, which allows employees who drive their own cars to receive tax-free reimbursements from their employers for fixed vehicle costs (such as insurance, taxes, and registration fees) and variable vehicle costs (such as fuel, tires, and routine maintenance and repairs).
The cost of the car under a FAVR plan must not exceed a maximum amount determined by the IRS each year. Automobiles, trucks, and vans may not cost more than $56,100 in 2022, up from $51,100 in 2021. These rates will not change until 2022.
According to Revenue Procedure 2019-46, an employer may provide an FAVR allowance only to an employee who can provide adequate records showing at least 5,000 miles driven during the calendar year in performing services as an employee or, if greater, 80 percent of the annual business mileage of that FAVR allowance. The employer may prorate these restrictions on a monthly basis if the employee is covered by the FAVR allowance for less than the complete calendar year.
three months," according to the law, because employee payments must be provided at least quarterly.
Car Allowances are Fixed
A flat car allowance, which is a set amount provided to employees over a set period to cover the costs of using their own car for business purposes—for example, $500 per month for the cost of fuel, wear and tear, tires, and more—is another way for employers to reimburse employees for their business-driving expenses. Employers might also pay expenses for different locations at a variable rate.
While a car allowance is simple to administer, payments to employees are taxable unless they are made under an "accountable plan" that requires verification through proper records and the timely return of excess amounts.
IRS standard mileage rates for business, medical, relocating, and charitable deductions are normally determined in the fall for the next calendar year, based on the average per-mile cost of operating a car for those indicated uses. A mid-year correction is often necessary, as it is for 2022 and was for 2011, most typically to accommodate for a major increase in the cost of fuel and other petroleum products. Because of the mid-year adjustment, there are two sets of mileage rates for the year.
For 2022, business mileage rates are 58.5 cents per mile through June 30 and 62.5 cents per mile from July 1 to December 31. Increased demand versus supply is the fundamental cause of the correction.
In conclusion, for the remainder of 2022, the IRS has increased the regular mileage rates.
Business mileage will be charged at a new rate of 62.5 cents per mile. Medical mileage and relocating fees will be increased to 22 cents per mile (for active-duty military only). Charitable mileage is regulated by law and will continue to be 14 cents per mile. The new rates will be in effect from July 1, 2022, to December 31, 2022. A mismatch between supply and demand for petroleum products has increased in mileage rates.
We, at Vincere Wealth, can answer any further questions you may have. Talk to our financial advisors today. Get in touch with us.