Don't Mess With Taxes

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If you used your car for business purposes last year, you probably did the same thing I did on New Year's Eve. You took a quick look at your auto's odometer and jotted down the miles.

Keeping track of your annual miles driven and those specifically attributable to business travel can help you reduce taxes on your self-employment income. There are a couple of ways you can track this travel, either by keeping good records of your actual business-related auto usage (more on this in a minute) or by claiming the optional standard mileage amount.

That standard amount is adjusted annually for inflation. And while we tend to think of inflation bumping up the price of things, tax and otherwise, it works the other way, too.

2020 standard mileage rates down a bit: The Internal Revenue Service's 2020 per-mile business rate, which was released Dec. 31, 2019 (nothing like cutting it close, IRS!), dropped one-half a cent today, Jan. 1, 2020.

It goes this tax year to 57.5 cents per mile that you drive your car (or van, pickup or panel truck) for business use. In 2019, that rate was 58 cents per mile.

But wait, there's more!

Uncle Sam's tax collector also establishes optional standard mileage rates for some other tax-related travel. This includes driving connected to medical treatments and, in some cases, for moving. Miles driven for charity work also can be claimed as an itemized expense.

The table below illustrates which rates apply to this brand spanking new 2020 and, for the filing of your 2019 return, last year's tax-deductible travel, too.

Business mileage deduction choice: Many business taxpayers use the standard rate when figuring how much in mileage costs they can claim. It's easy and just requires you to keep track of your work-related miles.

But note that you always have the option of calculating the actual cost of using your vehicle rather than using the standard mileage rates.

The mileage deduction choice, like every other tax decision, depends on your personal situation.

In most instances, it's a no-brainer to use the one that will give you more tax savings. Some filers, however, find convenience is more valuable, especially if the tax-saving difference is, from your perspective, negligible.

Make your choice wisely, especially if you're claiming the business mileage rates for the first time. The IRS points out that you can't use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.

The upshot is that if you initially opt for the actual expenses method, you're stuck with it for as long as you use that vehicle.

This and other limitations, such as the number of simultaneously-used vehicles for which the standard rate can be used, are described in Revenue Procedure 2019-46, issued by the IRS back in mid-November to spell out the mileage deduction rules changed by the Tax Cuts and Jobs Act (TCJA).

No more miscellaneous mileage claims: You can, of course, read the IRS revenue procedure yourself, but the gist of it is that the tax reform measure that became law on Dec. 22, 2017, suspends through 2025 the miscellaneous itemized deduction on Schedule A for most employees with unreimbursed business expenses, including the costs of operating an automobile for business purposes.

Don't freak out if you're self-employed. This doesn't apply to you Schedule C filers and other self-employed taxpayers. You can still claim your qualifying work-related miles on your taxes.

In addition, Armed Forces reservists, qualifying state or local government officials, educators and performing artists also still can deduct unreimbursed business expenses under the TCJA.

If any of these exemptions apply to you and you're still a bit confused, don't freak out. Your tax preparer or software can help.

Medical deduction help: The TCJA tweaked the itemized medical expenses claim a bit, lowering it for its first year (2018) from the scheduled 10 percent of adjusted gross income (AGI) threshold to the prior 7.5 percent threshold. The recently enacted federal spending bill extended that lower AGI percentage for the 2019 and 2020 tax years, too.

This will help more filers claim deductible doctor et al expenses. And to ensure they have enough medical costs to exceed the deduction threshold, they need to claim all their medical-related travel, too.

Good records of such medical travel are particularly important in tax years like 2020 where the rate is lower. You can claim this year's 17 cents per mile for eligible driving to medical treatments (and, in some instances, conferences), as well as trips to the pharmacy to pick up your prescriptions and, in some cases, popular over-the-counter DNA tests. The IRS has a full (and ever changing/expanding) list of deductible medical expenses.

Moving expenses also limited by tax reform: The write-off for moving mileage, although lower in 2020, also should help those eligible to claim this above-the-line tax deduction.

The TCJA, however, also has reduced the number of taxpayers who now can claim moving expenses. Civilians who move for new jobs no longer can claim these expenses.

Under prior tax law, any person who moved for job reasons (and who met the distance and time rules) could claim their relocation costs as an above-the-line tax deduction. The tax reform law enacted in late 2017 eliminated this tax break for non-military movers.

The tax reform bill limits the relocation deduction, at least through the 2025 tax year, to U.S. Armed Forces personnel who are on active duty and who move pursuant to a military order related to a permanent change of station.

Charitable driving still allowed: The TCJA left the itemized deduction for charitable donations in place. Those amounts can include miles driven in connection with services for and by an IRS-authorized charity.

Common charitable mileage claims include delivering meals to the home-bound or providing transportation to individuals who are getting help from a qualified charity.

This rate is still at 14 cents per mile where it's been for years.

The reason for no fluctuation? It's set by statute and therefore is not affected by inflation.

If you agree with me that it should be inflation adjusted, too, let your U.S. Representative and Senators know.

Why the mileage rates differ: The 2020 drops in the optional standard mileage rates reflect the economy's low/no inflation status.

I know, you'll never convince me of low inflation based on my grocery bills, but in these travel cases, the IRS says that's so.

The tax agency also explains in its Notice 2020-05 why the medical and moving standard rates dropped so much more than the one for business-related driving.

These mileage rates, aside from the one set for charitable travel, are based on annual studies of the fixed and variable costs of operating a vehicle.

The biggest fixed automotive cost is the vehicle price. The biggest variable cost is gasoline.

The rate for business road travel is based on the both the vehicle's fixed and variable costs. The rate for medical and moving purposes, on the other hand, is based only on the variable costs.

Those different vehicular cost categories account for the differences in the rates.

Hitting the inflation highway: The annual mileage rate tweaks that the IRS makes to technically aren't part of the agency's overall inflation adjustments that are put out in two major announcements, generally each fall.

But the mileage rate adjustments merge nicely into that changing tax amounts roadway.

That's why they have earned the final spot in the ol' blog's 10-part inflation series. The boxed info below has more on the other 2020 inflation amounts and where you can find them.

Welcome to Part 10 of the ol' blog's 2020 series on tax inflation adjustments. 
We started on Nov. 6, 2019, with a look at 2020's income tax brackets and rates.
Today we wrap up the series with standard optional mileage rates.
Note: The 2020 figures in this post apply to 2020 returns to be filed in 2021.
For comparison purposes, you'll also find 2019 amounts to be used
in filing 2019 returns due April 15, 2020.

Thanks for reading. Happy New Year. And drive safely, regardless of whether your miles are tax deductible!

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