How to Turn Your Car Into Tax Savings with the New Mileage Rate

Jun 30, 2008

The Bottom Line Depending on your situation, a mileage deduction might be a great help for you.

The IRS just announced an increase for deductible mileage for our 2008 income taxes, effective July 1st. I thought this would be a good time to explain to people some often forgotten mileage-related deductions they may be able to take.

Business Mileage
Most people who use the mileage deduction qualify to take a vehicle deduction because they are either self-employed, which includes independent contractors, or use their vehicle for work. When I say "use their vehicle for work," I don't just mean that they drive to work (those miles would be commuting miles. I mean that they drive to work, and once there, they use their personal vehicle to go places their jobs dictate. A common example of this is a salesperson who leaves to cover a territory. Another example is someone who has to go from one location of the company to other company locations, or to the office supply store to pick up work supplies (such as a district manager of a company).

For people who qualify to take a vehicle deduction as a business or employee expense, there are two options.

The first option is to take the actual amount they spend on the car (gas, oil, repairs, insurance, etc.), as well as depreciate the value of the car. Depreciation gives you a percentage of your basis in the car every year for five and a half years. Your basis is either the amount you paid for the vehicle, or the value of the vehicle when you begin to use it for business purposes. When you use the actual expenses, you are limited to the percentage of the expenses equal to the percentage of business use for the car. For example, if you drive your car for a total of 10,000 miles in 2008, of which 6,000 are business miles, you will be able to deduct 60% (6,000/10,000) of your actual expenses. So, if your gas, oil, insurance and depreciation expenses for 2008 add up to $5000, your allowable actual deduction will be $5000 x 60%, or $3000.

The majority of taxpayers do not use the actual method. Instead, they take the standard mileage deduction. The standard mileage deduction gives taxpayers a flat amount per mile as their vehicle deduction. The IRS determines this amount and adjusts every year for inflation. For 2007, this amount was 48.5 cents per mile. So, in the above example, the standard mileage deduction would amount to 6,000 x $.485 = $2910. In this case, the actual expenses are just slightly better ($90 worth).

Note: once you begin depreciating a vehicle, you cannot switch back to the standard mileage deduction until the vehicle is fully depreciated, so $90 in one year might not be enough incentive to take the actual expenses if you know things will be changing drastically in future years. You should speak to your tax advisor to help you make that decision based on your situation.

Due to drastically increased gas prices, the IRS just announced that someone in that organization has a heart, and they will increase the standard mileage rate to 58.5 cents for the second half of 2008. This means that for every business mile driven from January 1st to June 30th, taxpayers will be able to deduct the predetermined value of 50.5 cents per mile, and for every business mile from July 1st to December 31st, taxpayers will be able to deduct 58.5 cents per mile. In order to defend your deduction, you will need to keep good records.

As someone who has been professionally preparing taxes for the past seven years, I've learned a thing or two about keeping mileage records. First, let me state the obvious: if you have no records of your mileage whatsoever, you have no business taking a mileage deduction! I have encountered at least 100 people over the years who are "sure" they have driven X amount of miles for business during the year "on the conservative side." Trust me, if the miles you claim look in the slightest bit excessive or have a bunch of zeros in them, there is a good chance the IRS will ask you for records, maybe even two or three years later.

So here's what the IRS asks for about miles on your tax return:

1. The total number of miles put on your vehicle all year

2. The number of miles driven for commuting

3. The number of miles driven for business

In the old days, people would substantiate their miles by keeping a little record book with their car's mileage total at the beginning of the trip and at the end of the trip. Then, they had to do math to figure the amount driven for the day. Now, since most vehicles have trip meters now, I recommend resetting the trip meter once you start the business portion of your day. When you're done, see what the trip meter says and write it down. That wasn't so hard, was it? My preferred method is to write in my datebook/BlackBerry/Palm Pilot/whatever you use, all the appointments you have for the day (preferably with locations). At the end of my business driving, I write the number from the trip meter on that date. Then, I just have to total them at the end of the year.

In addition to the mileage log, I have seen the IRS ask for proof of how many miles were put on the car for the year. In the letter, the IRS recommended using receipts from oil changes or other vehicle repairs done at the earliest part of the year, and again at the latest part of the year, since they usually have the mileage of the car as of that date on them. So, when you store your mileage log after filing your taxes, you should also store a couple of oil change invoices along with it.

**No matter how you keep your records, it will be imperative that you have the mileage from the first six months of the year totaled separately from the mileage of the last six months.**

Moving Mileage
Many people are unaware that you can also take a mileage deduction if you change residences and jobs at the same time. As long as the distance between your old home and your current job is at least 50 miles more than the distance between your old home and your old job, you can take a standard mileage rate for the miles you drive your vehicle from the old house to the new house.

With the new raise, the standard rate for moving is 27 cents per mile from July 1st to the end of the year. All earlier moves get 19 cents per mile.

If you itemize your deductions, which most people can only do when they pay mortgage interest, there are two other ways you can take a mileage deduction:

Medical Mileage
If you spend more than 7.5 percent of your adjusted gross income on unreimbursed medical and dental expenses, you can deduct those expenses. Included in those expenses is a deduction for miles you drive your vehicle going to doctors, dentists, hospitals, picking up prescriptions, etc. The amount of the medical mileage rate for 2008 is the same as for moving.

Volunteer Mileage
You can also take a deduction under Charity Contributions for mileage driven to do volunteer work, such as taking the Boy Scouts camping or driving to do volunteer work at a local school or religious organization. The volunteer mileage rate for 2008 is a flat 14 cents for the whole year.

The Bottom Line
Many people do not realize that they can get some extra tax relief by keeping track of certain mileage expenses. It's worth doing if any of the above situations apply to you, especially since the IRS just increased the rates for the last half of the year.

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