Figuring Your Tax Deduction After the IRS Boosts Mileage Charges

With gas prices soaring, the IRS has announced an increase in the optional standard mileage rate for the final six months of 2022.

Beginning July 1, 2022, the standard mileage rate for business travel will be 62.5 cents per mile. The new rate for deductible medical expenses or moving expenses for active-duty members of the military will be 22 cents. The 14 cents per mile rate for charitable organizations did not change—it remains the same as it has since 1998, since it’s set by statute and not subject to periodic review.

If you’re wondering about the difference in the rates for business and medical or moving purposes, the standard mileage rate for business is calculated using an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas, and oil. However, the rate for medical and moving purposes is based on variable costs, such as gas and oil. That’s why the increases aren’t proportionate—these bumps only reflect the spike in gas prices.

Previous Mileage Rates

If the midyear announcement sounds odd, it is. The IRS normally updates the mileage rates once a year—usually towards the end of the year—for the following calendar year. For 2022, the IRS issued guidance on Dec. 17, 2021, setting the optional standard mileage rate for the 2022 calendar year at 58.5 cents per mile driven for business use, 18 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, and 14 cents per mile driven in service of charitable organizations.

At the time, the national average for a gallon of gas hovered around $3.28. Flash forward to today when the national average has topped $5.00 per gallon. That difference prompted the change.

“The IRS is adjusting the standard mileage rates to better reflect the recent increase in fuel prices,” said IRS Commissioner Chuck Rettig. “We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses and others who use this rate.”

But unlike the annual announcement, the rates from the special announcement only apply to the final half of 2022. For travel from Jan. 1 through June 30, 2022, taxpayers should use the rates in the December 2021 announcement, found in Notice 2022-03.

Keep Great Records

The midyear adjustment will likely cause some confusion among taxpayers—especially when the next tax season rolls around. The solution? Keep excellent records now.

Contemporaneous records are always best since that eliminates the guessing game later. You can keep a simple paper mileage log in your car or use a mileage/maps app. In each case, be sure to record the date, total miles driven, and purpose of your trip—the more information, the better.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business. To use the rates, simply multiply the standard mileage rates by the number of miles traveled.

Figuring Your Deduction

It’s possible to use more than one type of rate on your tax return. Here’s how to calculate your deduction in 2022.

Let’s assume you drive 30,000 miles total in 2022. Of those, 5,000 were personal miles, 5,000 were charitable, 2,000 were business, and 3,000 were related to medical miles for the first half of the year. In the second half of the year, 5,000 were personal miles, 0 were charitable, 8,000 were business, and 2,000 were medical miles.

Here’s what that math looks like:

January-June 2022

5,000 personal miles x 0 = 0
5,000 charitable miles x .14 = $700
2,000 business miles x .585 = $1,170
3,000 medical miles x .18= $540

July-December 2022

5,000 personal miles x 0 = 0
0 charitable miles x .14 = 0
8,000 business miles x .625 = $5,000
2,000 medical miles x .22 = $440

In this example, if you itemize, your charitable mileage deduction would be $700 ($700 + 0), and your medical mileage deduction—subject, of course, to the 7.5% floor for medical expenses—would be $980 ($540 + $440).

Your business mileage deduction would be $6,170, deducted for use related to a trade or business on Schedule C. There’s no deduction on Schedule A: Tax reform eliminated the miscellaneous itemized deduction for unreimbursed employee travel expenses. Additionally, taxpayers cannot claim a deduction for moving costs unless they are members of the Armed Forces on active duty moving under orders to a permanent change of station.

Deducting Actual Costs

Taxpayers have the option of deducting actual costs rather than using the standard mileage rates, but that’s a lot more work. Actual costs include depreciation or lease payments, maintenance, and repairs, tires, the cost of gas, oil, insurance, and license and registration fees. To figure your deduction, total your expenses each year. The costs must be pro-rated if the car is used for personal and business use.

No matter which option you choose—the standard mileage rate or actual car expenses—parking fees, tolls, interest, and taxes are separately deductible for business, medical, moving, and charitable purposes.

Mileage Rates for Reimbursements

The mileage rates aren’t just used for deductions. They’re also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

Company mileage reimbursement for business use of your personal vehicle is generally tax-free. To keep things simple, many businesses use the IRS mileage rates. Companies can use a higher or lower rate, but the IRS rate is a safe harbor rate, making it a popular choice.

Alternatively, businesses may opt to pay fixed and variable vehicle costs. A Fixed and Variable Rate (FAVR) plan still allows for tax-free reimbursements based on variables like geography and other mileage-specific costs. FAVR plan allowance may not exceed certain maximums established by the IRS. For 2022, vehicle costs may not exceed $56,100 for automobiles, trucks, and vans.

Historical Adjustments

As noted earlier, midyear adjustments aren’t very common—the last time the IRS bifurcated the tax year was 2011. A weak dollar and turmoil in the Middle East had driven up gas prices.

But a few years before that, in 2008, the IRS also split the year for mileage rates. That increase was a whopping eight cents, bringing the business mileage rate to 58.5 cents—the same rate as the first half of 2022.

This is a regular column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.