How would you like to make your car get 220 miles to the gallon instead of 20? Or would you prefer, instead, to only pay $0.36 per gallon of gas? How about this: If your car gets good enough mileage then you get paid for putting gas in the car instead of paying? All of this is possible through some known, but sometimes unappreciated tax deductions.
For many of my clients, one of their biggest tax deductions is their car mileage. And yet this is also one of the least appreciated tax deductions, in my opinion. If you own a business, drive your own car for your employer, go to the doctor or even take boy scouts on campouts you could save money on your gas bill.
What About Bob?
To illustrate the possibilities, let’s imagine a man named Bob. Bob uses his own car to make some deliveries and visit some clients for his employer. For Bob this adds up to about 150 miles per month. Bob is currently paying $4.00 per gallon for gas and gets about 20 mpg in his Camry. Bob and his wife make a decent living and, between Fed & State, they are in a 36% marginal tax bracket.
At tax time Bob brings his records to his accountant:
1,800 miles driven for work
90 gallons of gas attributable to those miles
$4.00 per gallon average cost
Bob’s accountant prepares his taxes and shows Bob the following:
1,800 miles x $0.505 per mile = $909 in deductions x 36% = $327 tax savings
$360 gas expense – $327 tax savings = $33, or $0.36 per gallon
– or –
$33 net gas cost / $4.00 per gallon = 8.25 gallons
1,800 miles / 8.25 gallons = 220 miles per gallon
Needless to say, Bob is pretty happy he kept track of his miles. And get this: if Bob’s car was more fuel efficient and got 23+ mpg (or if gas prices went down to $3.60 per gallon) Bob would actually be getting more back in tax savings than he paid for the gas. He would be getting paid to put gas in his car!
You Don’t Drive Your Car for Work?
You may drive for work even if you don’t realize it. Many professions require some form of continuing education. If you use your vehicle for such a reason and are not reimbursed this would be qualified mileage. Even if you don’t use a vehicle for any work related reason there are still benefits to be had.
While the benefits are the greatest for business related mileage, there are deductions for other common things. Do you ever drive to the doctor, dentist, hospital, pharmacy, etc.? As long as these trips are for qualified medical reasons they are deductible at a rate of $0.19 per mile. Do you ever do volunteer work? If you drive your car for a qualified charitable organization (Boy Scouts, Church, etc) or to do volunteer work for such an organization, those miles are deductible at a rate of $0.14 per mile. So, to continue the idea of your effective mileage:
Reason for use MPG Adj. CostPersonal (actual cost) 20 $4.00
Business 220 $0.36
Medical 30 $2.63
Volunteer 27 $2.99
It is clear that the tax deduction is still worth taking note of, even if you don’t have business miles.
Is There a Catch?
No catch, but there are a lot of assumptions built into the scenario I have described – and a change in any of them would change the results to some extent. Some major assumptions are that Bob (or you) have enough deductions that you would itemize instead of taking the standard deduction. Also, this assumes that you have met the 2% of AGI limit for employee expenses or 7.5% limit for medical expenses. (However, if you own your own business the mileage deduction comes of 100% as a business expense, regardless of whether you itemize personal deductions).
The assumed tax bracket also affects the results. There are several other things to take into account as well. I recommend that you talk to a tax professional about your specific situation before assuming that these things apply to you.
I also run into two common misunderstandings when discussing this. The first is that commuting miles to and from your home and main place of business are not counted as business miles. These are personal miles in the eyes of the IRS. The second is that if your employer (or the volunteer organization) reimburses you for your mileage you may only deduct the difference between the employer’s reimbursement rate and the standard rate.
What Do I Need To Do To Claim My Gas Rebate?
In the event that the IRS wants to verify your figures (i.e. audit you) you will need to provide the following:
- Date of each trip
- Beginning and ending odometer readings for each trip
- Reason for the trip
- Beginning and ending odometer readings for the entire year
There are very inexpensive ($2-$5) record books at office stores and online. I would recommend getting one and keeping it in your car to make it easy to keep track of all the mileage that you may be able to write off at the end of the year.
The mileage rates in this article are for 2008 expenses and are adjusted each year. States may also deduct mileage at a different rate than the Federal Government.
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.