Don't Mess With Taxes

Drivers faced plenty of challenges in 2022, notably the dramatic jump this year in fuel prices. That prompted the Internal Revenue Service in June to hike 2022's optional standard mileage rates for the last six months of the year.

Now the IRS has bumped up the business rate again as part of its annual adjustments to a variety of tax laws.

Beginning on Jan. 1, 2023, the standard optional mileage rate for a car (or van, pickup or panel truck) used for business purposes will be 65.5 cents per mile. That's up 3 cents from the midyear increase that applies to such miles during the second half of 2022.

The IRS announcement also noted that the June 2022 change, effective July 1, for medical miles and moving by military personnel will hold in 2023 at the current 22 cents per mile.

Finally, there's the write-off for the miles you drive to provide services on behalf of charitable organizations. It remains at 14 cents per mile, since it's mandated by law and can only be changed by Congress.

2022 and 2022 and 2023 mileage rates overview: The mileage rate hike in July due to skyrocketing gas prices was welcome by folks who track their driving for tax purposes. However, it does mean we'll (yes, I'm one of the business drivers) have to do twice the calculating on our 2022 returns.

Then when the new year arrives in just a couple of days, we'll have to shift our math number to the 2023 rate.

Since many of us are wrapping up our 2022 record keeping, the table below illustrates which rates will apply on this year's tax filings, as well as the rates for 2023 that we'll track during the coming 12 months.

Again, not to overthink things or overstate the obvious (but that's me; just ask the hubby), remember the timing on these tax-deductible miles.

The dual 2022 amounts will be used to calculate allowable travel claims on the tax return you file next year. The 2023 amounts will be used when you file that year's tax return in 2024.

Tracking tax-related travels: Knowing your tax-deductible mileage amount is just part of the equation. You also have to accurately record the number of miles you drive each year.

The business miles can help you reduce taxes on your self-employment income. This obviously is a major write-off for those who are their own boss full-time. But the deduction also applies to gig jobs you have in addition to your wage paying main work.

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

Why the mileage rates differ: Most folks who claim the business miles tend to complain that the rate is not really high enough. So how does the IRS arrive at that figure?

The annual mileage rate changes generally reflect the way the economy and inflation are going. Some years, like two times in 2022 and in 2023, it increases. Other times, as in 2021, the mileage rate goes down.

But there's more to it when it comes to cars.

The standard mileage deduction amount is adjusted annually based on the yearly study of two automotive factors, the fixed and variable costs of operating an auto. The tax agency explains in Notice 2023-03 (yep, the IRS is getting a jump on the new year in its notice releases) that it hires an independent contractor to calculate the mileage rates, aside from the charitable one that's set by law, and to evaluate the fixed and variable costs of operating a vehicle.

The business rate is determined using both the fixed and variable costs studies. The rate for medical and moving purposes is based only on the car's variable costs

The biggest fixed automotive cost is the vehicle price. The biggest variable cost is gasoline. And it's those different vehicular cost categories that account for the differences in the rates.

Since the business driving rate is based on both sets of vehicle costs, when it goes up, the amount tends to be more than the medical or moving categories. That's what's happening in 2023.

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

Business mileage deduction choice: Many business taxpayers use the optional 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 tax-speak for additional calculations you'll have to make here.

The upshot is that if you initially opt for the actual expenses method the first time you ever make a business mileage tax claim, you're stuck using that method for as long as you use that vehicle.

If, however, you choose the optional standard mileage rate when you first put a vehicle into business use, in later years you can choose to keep using the fixed-mile rate or switch to totaling your auto's 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 as a wage-earning staffer aren't of any tax use, for now.

The 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 their jobs. 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.

A medical mileage tax Rx: The TCJA also greatly increased the standard deduction amount (you can read about those 2023 increases in Part 2 of the annual inflation series), which means most taxpayers use that method instead of itemizing tax deductions on Schedule A.

However, some filers still find itemizing gives them a larger deduction. In many cases, that's because they have a lot of deductible medical expenses. Among those costs that count here is medical-related travel.

The 18 and 22 cents per mile rates for 2022, and 22 cents for all of 2023, include road trips to medical treatments (and, in some instances, medical 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 remains, but (again thanks to the TCJA) only for certain taxpayers.

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, civilians are out of luck. This tax deduction is available only to members of the military.

Specifically, this above-the-line tax deduction currently is only available 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 cheated: Some who choose to itemize also count on deductible charitable donations to increase their itemized tally. Those gifts to nonprofits can include miles driven in connection with services for and by an IRS-authorized charity.

Common charitable mileage claims include volunteer delivery of 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? As noted earlier in this post, this 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. They did agree to a non-itemizing charity deduction during the height of the COVID-19 pandemic, but that direct deduction expired at the end of 2021.

Exiting 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.

As you set your route into the 2023 tax year, you can use the rest of the 2023 inflation entries map by clicking on the link to Part 1 in the below box. That initial post has a complete inflation series directory at the end of the item.

This post on changes in 2023 to deductible mileage rates is Part 10, the final one in the ol' blog's annual series on myriad annual tax inflation adjustments.  The 10-part series started with a look at next year's income tax brackets and rates. That first item also has a directory, at the end of that post, of all of the previously posted tax-related inflation updates for 2023. Note: The 2023 figures in this post apply to that tax year's returns to be filed in 2024. For comparison purposes, you'll also find 2022 amounts that apply to this year's 2022 taxes that will be due April 18, 2023.

I know many of you are like the hubby, focused on getting to your destination as quickly as possible. I, on the other hand, enjoy the journey. Whichever traveler, tax or real life, you are, thanks for reading this final inflation series post and the other nine. And if you're like my better half, thanks especially for your patience with the time it took to finish up the series.

 

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