IRS makes a surprise move that could help entrepreneurs, side hustlers save on taxes as gas prices hit $5/gallon

Key Points
  • Starting July 1, the IRS will raise the "optional standard mileage rate" used to calculate tax deductions by 4 cents a mile for the rest of 2022.
  • Mileage rates are used to calculate tax deductions, like driving a car for work or to medical appointments.
  • The surprise move comes as gas prices hit an all-time high of $5 per gallon, according to AAA.

A gallon of regular gas costs an average $5 nationwide for the first time ever, according to AAA. In response to the recent surge in fuel prices, the IRS just made an unusual move that could help millions of drivers save a little more in taxes.

The tax agency is increasing the "optional standard mileage rate" used to calculate tax deductions. For the second half of 2022, that rates will increase by 4 cents a mile, the IRS announced last week.

This higher mileage rate, which are used to calculate certain tax deductions for business and other uses of a car, like driving to a medical appointment, will take effect on July 1.

Mileage rate changes 'to help taxpayers'

Normally, mileage rates are adjusted for inflation only once per year, but given a few factors, the IRS has decided to make this midyear change.

"The IRS is adjusting the standard mileage rates to better reflect the recent increase in fuel prices," IRS Commissioner Chuck Rettig said in a statement. "We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses and others who use this rate," he said.

The mileage rates that will increase in the second half of 2022 include:

  • Business use of a car, which will rise from 58.5 cents to 62.5 cents per mile.
  • Deductible medical travel and moving expenses for active-duty members of the military, which will rise from 18 cents to 22 cents per mile.

Charitable use of a car will remain at 14 cents per mile since it's fixed by law and not subject to adjustments for inflation.

How to calculate your mileage for business purposes

If you're self-employed and drive for work, there are two ways to calculate your mileage for your tax return. You can use the standard mileage rate or calculate your actual costs.

The standard mileage rate means you keep track of the miles you've driven for work, or for approved medical visits, and then you multiply them by the new rate per mile.

It's important to keep a good record of your mileage, Howard Samuels, a certified public accountant at Samuels & Associates in Florham Park, New Jersey told Grow earlier this year. "There are several apps that are out there that you can actually download and when you get in the car you hit the app to track your miles," he says.

Once you've tracked those miles, here's an example of what your deduction would look like: Let's say you deliver food and you drove 1,000 miles for work from July 1 to December 31. You would multiply 1,000 miles by 0.625 per mile and could qualify to deduct $625 when you file your 2022 tax return.

Tax credits vs deductions: Here's the difference

Video by Stephen Parkhurst

The other method for deducting your car use on your taxes is called deducting the actual cost, which requires more record keeping of expenses and purchases. This type of deduction allows you to include expenses like gas, oil changes, new tires, insurance, and fees like for a license or vehicle registration.

Deducting mileage for medical purposes

Broadly speaking, you can qualify to take a medical expense deduction if your unreimbursed medical and dental costs in a given year exceed 7.5% of your adjusted gross income. Eligible taxpayers can deduct the portion of those expenses exceeding that threshold.

Using a car for medical appointments can count as an expense: You can tally the mileage you drive when transporting yourself, a dependent, or a spouse to receive medical treatment.

Let's say you are undergoing treatment for a medical issue and you drive 500 miles for medical appointments from July 1 to December 31. You would multiply 500 miles by 0.22 per mile and include $110 as a qualifying medical expense.

This content is provided for informational purposes only and is not intended to provide, and should not be relied on for, accounting, legal, or tax advice. Consult your accountant, tax, or legal advisor regarding such matters.

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