In Unusual Mid-Year Move, IRS Raises Standard Mileage Deduction

The Internal Revenue Service (IRS) made an unusual announcement by increasing the optional standard mileage rate on June 9, 2022. (Pathdoc/Shutterstock)

The Internal Revenue Service (IRS) made an unusual announcement on June 9, raising the optional standard mileage rate for the final six months of 2022. The move comes as sky-high gas prices continue across the country.

The IRS hasn’t changed the mileage rate mid-year since 2011. Typically such increases are enacted in the fall, for the following tax year. This increase will take effect on July 1, 2022.

According to the new rate, the amount that individuals can expense for business purposes will increase from 58.5 cents per mile to 62.5 cents per mile. That’s a 4-cent increase over January 2022’s rate of 58.5 cents, and up from 56 cents a mile in January 2021.

The rate for medical or moving travel also increased, from 18 cents per mile to 22 cents per mile.

The mileage rate for charitable purposes did not change. It is set by statute and remains at 14 percent per mile.

A ‘Special Step’ to Help Taxpayers

The increase is intended to “better reflect the recent increase in fuel prices,” said IRS Commissioner Chuck Rettig in a news release dated June 9. The IRS is “taking this special step to help taxpayers, businesses and others who use this rate,” said Rettig.

Consumers may be underwhelmed by the 4-cent increase. The average gas price nationwide is over a dollar more than it was in January, rising from $3.31 (January 18, 2022) to $4.842 (July 1, 2022).  The average gas price in California on July 1 was $6.27.

Who Is Eligible

Until 2018, employees could deduct mileage and other unreimbursed business expenses if these expenses exceeded more than 2 percent of their adjusted gross income. The 2017 Tax Cuts and Jobs Act (TCJA)—which also reduced tax rates and doubled the standard deduction—suspended most of those 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 rideshare services, says HR Block.

Others who can take advantage of the standard mileage deduction are qualified performing artists, reservists in the armed forces, fee-based government officials, and individuals with mental or physical disabilities who pay for attendant care at their place of employment.

In addition, mileage deductions can be taken for medical or volunteer travel.

Moving Deduction Remains for Military

The TCJA also eliminated the standard mileage deduction for travel due to moving cross country for employment. Prior to 2018, if your employer was not going to reimburse you for travel costs, a standard mileage deduction could be taken.

This deduction remains in effect, however, for active-duty armed forces members who are moving to a change of station.

Employers Not Affected

Companies are not federally required to reimburse employees for mileage, although state laws vary. If they do, the employer may set the amount of reimbursement. However, says Business News Daily, if 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 Business Vehicle?

A vehicle must be used for business activities to qualify for the mileage rate deduction. It can be a car, SUV, or truck. Business vehicles that are dump trucks or vehicles used for hire, such as hotel shuttles, are not eligible for the mileage rate deduction. But certain taxi drivers, as well as drivers for services such as Uber and Lyft, are eligible because the drivers are self-employed.

Mileage Deduction Adds Up

A self-employed individual can deduct mileage on personal cars used for business. Although you can’t deduct traveling to the office, you can deduct other business driving.

If you deduct this mileage, the IRS requires a log with the date and activity. That log should include dates, destinations, the reason for travel, and mileage amounts.

It may be worth the effort to keep records. Deducting this mileage can add up. For instance, if you’re in sales or an Uber driver and drive 10,000 miles for the remaining part of 2022, under the new rate of 62.5 cents, your deduction would be $6,250. That’s significant. Here’s a calculator to help you determine your mileage deduction.

You can only deduct business mileage. Personal mileage is not eligible. Also, be aware that you must itemize on your income tax return to take this deduction.

Deducting Actual Expenses

The change in the IRS mileage rate doesn’t 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 up, they are multiplied by the percentage of business used. So, for instance, if you used your vehicle for business 50 percent 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 want to use the standard mileage rate method, be aware that you must do so in the first year you use your car for business. In later years, however, you may choose either method.

Compare Deduction Results

Run the numbers when choosing whether to use a standard mileage deduction or 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 want to use the standard mileage rate method, be aware that you must do so in the first year you use your car for business. In later years, however, you may choose either method. It follows that if you go with the actual expense method the first year of declaring, you must continue with the actual expense deduction for the duration you own the vehicle.

If you choose the standard mileage deduction on a leased vehicle, you'll be locked into that method until the lease runs out.

Key Takeaways

Because of rising gas prices, the IRS has increased the standard mileage rate deduction to 62.5 cents per mile.

Although the increase lags way behind actual gas price increases, it still represents a potentially large saving for many drivers, particularly the self-employed. If you’re considering taking an actual expense deduction instead, run the numbers to see which method will save you the most at tax time.

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