At the end of each year, the Inland Revenue Service (IRS) puts into place a new federal mileage rate for the following year – this rate determines how much you can deduct on each mile for people using the standard mileage rate. Today we’re taking a close look at the categories that pertain to the standard mileage rate, along with a little information about the actual expenses method, with a focus on how consumers can maximize their returns depending on the situation.
If you drive a vehicle for any number of non-personal activities, there is a lot of vital information that you need to know – not to mention tax rebates you can get in on. So, without further ado, let’s get into it.
Types of IRS Mileage Rates
If we break down the standard mileage rates released every year, there are a number of subcategories. Each category has its own corresponding rate, with normal business mileage offering the largest deduction. The main categories here are business mileage expenses, charity mileage expenses, medical mileage expenses and finally moving mileage expenses.
Before we get into the specifics involved in each category, it is important that we first understand the standard mileage rate.
How Does the Standard Mileage Rate Work?
The standard mileage rate is the most commonly used mileage tax deduction method on the American market, and it makes things pretty simple for most by simply offering a certain amount of cents that people can claim tax on per mile that they do for the relevant category. It also requires you to keep a mileage log and is quite different from its alternative; the actual expenses method. The actual expenses method requires you to provide receipts with itemized deductions.
Usually, small business owners, independent contractors, and freelancers take advantage of this simply through the business mileage expense rate – which is 58.5 cents per mile in 2022. Let’s examine an applicable example:
Adam drives his Porsche Boxter for his real estate business, doing 23,500 miles per year for business alone. Under the standard mileage rate, Adam can deduct $13,750 through the IRS – provided, of course, that he has all the necessary documentation and presents a mileage log that meets all of the IRS’s form requirements. Let’s take a look at the rates for each category.
- For business purposes, 58.5 cents is deductible per mile
- For medical or moving purposes, 18 cents is deductible per mile
- For charity purposes, 14 cents per mile is deductible
Moving forward, let’s delve into each category and what they entail in detail.
Business Mileage Expenses
While the above example certainly encapsulates most of what people who deduct mileage tax for business expenses should know, there are some additional points worth mentioning. First off, it’s important to differentiate between personal and business mileage. Your personal mileage includes commuting to and from work, or, any trips you make for obviously personal reasons. Conversely, business mileage covers a lot of trips you make, whether those trips are for anything you need for work, meeting clients for business lunches, or even the most simple of business errands.
Charity Mileage Expenses
If you drive your vehicle as part of work for some kind of charity or non-profit, you may qualify for tax rebates. The IRS stipulates that a volunteer who works for such an organization can claim tax back on their mileage, provided that the trip serves a purpose in a “genuine and substantial sense.” If you’re an activist, this might mean a trip between places where a demonstration is organized, or, the delivery of items on the part of the organization itself.
Moving Mileage Expenses
In 2017, the Tax Cuts and Jobs Act (TCJA) made it so that only active-duty military members can claim relocation expenses. To do this, you must include evidence of your active service, along with including that evidence when you submit your IRS form 3903 or 1040. Persons who qualify must also be a member of a protected area that is responsible for more than 100 miles around your home.
Alternatively, your relocation can be part of military order and it must be a permanent relocation. A per diem calculator can also be useful in helping you determine if you meet the IRS’s moving expense mileage deduction criteria.
Medical Mileage Expenses
If you’re making regular hospital or clinic visits when your costs exceed 7.5% of your AGI (Adjusted Gross Income) you can qualify for a tax deduction. To take an example, Sally earns $60,000 as a marketing assistant at a local firm. Unfortunately, due to a terrible car accident, Sally has now spent more than $6,000 in recovery, meaning she qualifies for mileage tax deductions to and from the clinic at 18 cents per mile. In this case, any mileage she does past $4,500 in medical expenses should be recorded – since $4,500 represents the threshold of where she qualifies for the deductions with a salary of $60,000.
How the IRS Sets Mileage Rates
The rates that correspond to the aforementioned categories are determined primarily through data analysis which is collected and analyzed by a firm named Motus. They add up all the data itself conducting an extensive analysis, which takes into account variable costs related to travel expenses, gas, oil, depreciation, insurance premiums for automobiles, along with any other relevant costs.
In essence, Motus constructs an accurate analysis of all costs associated with the operation of a vehicle; distilling it down to what equates to a basic cost per mile to drive in the U.S.
Calculating Mileage Deductions
If you’re using the standard mileage rate, this process is fairly easy, as illustrated by the previous examples in various categories.
Things get a little trickier when you’re dealing with enterprise companies or small businesses with a fair few employees – these fall into the category of mileage reimbursement – a topic best explored in-depth on another day.
In short, employees and employers agree on deductions which are both based on the standard mileage rates, and any additional car-related expenses if an employee is using a personal vehicle. Automobile business expenses related to mileage reimbursement are complicated, so we do recommend you explore the topic further on your own terms if you are a business owner or employee.
Creating and Maintaining a Mileage Log
One of the most important aspects involved in getting your deductions from the IRS with the standard mileage rate is the creation and maintenance of a mileage log – and there are many out there. Mileage logging software can help you stay on top of your mileage by manually or automatically tracking it through a variety of methods.
We had particular success with one app in particular – MileageWise. The software provides three different methods of auto-tracking, retrospective mileage reconstruction, and even a mileage log preparation service for those who might be a little behind when it comes to documentation and the IRS. Of course, there are many apps or pieces of software out there tailored specifically to this purpose, but this provider seemed to offer the best mileage tracking app for this purpose.
Whatever the case, staying on top of your mileage for a variety of activities whether they are business, medical, charitable or otherwise can save you a lot of money. It’s important to keep your tax knowledge sharp if you want to maximize your returns. We hope that we’ve helped you along that path today.