Don't Mess With Taxes

Welcome to Part 10 of the ol' blog's series on 2021 tax inflation adjustments. 
We started with a look at next year's income tax brackets and rates.
That first item also has a directory, at the end of the post,
of all of next year's tax-related inflation updates.
Today we wrap up the series (finally!) with standard optional mileage rate changes.
Note: The 2021 figures in this post apply to that tax year's returns to be filed in 2022.
For comparison purposes, you'll also find 2020 amounts that apply to this year's taxes, due April 15, 2021.

As the year winds down, all of us who used our autos for business purposes are tallying those related expenses.

They're likely to be fewer vehicle-related expenses to count in 2020, since COVID-19 isolation protocols meant more of our business meetings were online instead of in person. Even with coronavirus vaccines going out across the country, those Zoom sessions are likely to remain the norm, at least for the first half or so of 2021.

Another thing that's going to be the same next year is that the tax value of our business travels drops. In 2020, the standard mileage rate that the Internal Revenue Service says we can use to calculate this expense was smaller than the previous year.

In 2021, the per-mile rates for business driving, as well as allowable medical and moving travel also is less.

Next year the business rate is 56 per mile, down a cent and a half from 2020.

Tracking tax-related travels: Keeping track of the number of miles you drive each year to conduct business can help you reduce taxes on your self-employment income.

You have a couple of ways to track this travel. You can keep good and complete records of all your actual business-related auto usage (more on this in a minute) or you can claim the optional standard mileage amount.

That standard amount is adjusted annually based on an annual study of the fixed and variable costs of operating an auto. Some years, that goes up. Others, as in 2020 and the almost here 2021, those expenses go down.

And while the methodology is not technically inflation-based, because the tax-related figures tend to change, the annual announcement of the upcoming standard mileage rates always wraps up the ol' blog's annual 10-part inflation series.

2021 standard mileage rates down all around: The IRS' 2021 per-mile optional standard business rate, which was released today (Dec. 22, 2020), will fall by a penny and a half on Jan. 1, 2021.

That means next year you'll get to count for tax expense purposes 56 cents per each mile that you drive your car (or van, pickup or panel truck) for business use. In 2020, that rate was 57.5 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 will apply in 2021, alongside this year's rates that you'll use to file your 2020 tax return.

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. Yeah, that's a lot of IRS and tax-speak for additional calculations you'll have to make here.

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.

If, however, you choose the standard mileage rate when you first put a vehicle into business use, you have the option in later years to keep using the fixed-mile rate or total your actual expenses.

Note, too, that if you lease your business use vehicle, you must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.

No more miscellaneous mileage claims: What if you drive your car for work but you're an employee and not your own boss? Sorry, but those work-related miles aren't of any tax use, for now.

Tax Cuts and Jobs Act (TCJA) that became law at the end of 2017 eliminated through 2025 the miscellaneous itemized deduction on Schedule A where employees could claim unreimbursed business expenses, including the costs of operating an automobile in connection with their jobs.

Again, this affects only salaried workers who drive in connection with work. In these cases, you need to talk with your employer about an adjusted compensation or reimbursement method.

If, however, you are self-employed, the miles you travel for your company still count. 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, tax software or IRS Tax Topic 510, Business Use of a Car, can help.

Medical deduction help: The TCJA also tweaked the itemized medical expenses claim a bit, lowering it in 2018 from the scheduled 10 percent of adjusted gross income (AGI) threshold to 7.5 percent of AGI.

That reduction was continued on a year-by-year basis after the TCJA's enactment. However, the second round of COVID-19 relief approved by Congress on Dec. 21 and expected to be signed into law soon, makes the 7.5 percent of AGI threshold permanent.

This will help more filers plan for and claim deductible medical expenses. Among those costs that count here is medical-related travel.

Good records of deductible medical expenses are particularly important in tax years like 2020 and 2021 where the mileage rate is lower. You can claim this year's 17 cents per mile and the 16 cents per mile in 2021 for trips to medical treatments (and, in some instances, conferences), as well as when you drive to the pharmacy to pick up your prescriptions. 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 2021, 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 costs.

Until tax reform was enacted in late 2017, any person who moved for job reasons (and who met the distance and time rules) could claim their relocation costs on their taxes. Now, however, this tax deduction is available only to members of the military who must move per official armed services orders.

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 from the prior year? The rate is 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 2021 drops in the optional standard mileage rates generally reflect the economy's low/no inflation status.

But there's more to it when it comes to cars. The tax agency also explains in its Notice 2021-02 why the medical and moving standard rates changes are not quite as much as the one for business-related driving.

The independent contractor hired by the IRS to calculate the mileage rates, aside from the charitable one that's set by law, evaluates 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 driving is based on the both the vehicle's fixed and variable costs. The rates for medical and moving purposes, on the other hand, are based only on the variable costs.

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

Hitting the inflation highway: As noted earlier in this post, the IRS' annual mileage rates notice technically isn'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. So each year it is the final post in the annual look at how inflation affects myriad parts of our taxes.

You can check out the other nine parts of that 2021 inflation amounts in the directory at the end of the series' first post on income tax bracket inflation changes.

Thanks for reading and hanging in here for this last 2021 inflation update.

Merry Christmas. Happy Holidays. And definitely so long 2020 and on to a much better 2021!

Drive safely wherever the road takes you, regardless of whether your miles are tax deductible!

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