When gas prices creep upward, it's good to know that the Internal Revenue Service has your back -- at least to some extent. Not all miles are deductible, and the tax break associated with them is usually of more benefit to those who are self-employed. But under some circumstances, the deduction can nip away at your driving costs at the rate of 55.5 cents per mile, as of 2012.
Rules for the Self-Employed
If you're self-employed, all your business miles are deductible. Your work location is the starting point, so if you have a home office, your business mileage begins from the time you drive away from your residence – but only if you're driving for work-related reasons. If you meet clients in a separate business location, but you perform the logistics of running your business at home, your miles to your business location are deductible. If your work location is your primary place of business, however, the IRS considers these miles commuting and you can't claim them. If you use your vehicle for both personal and business driving, you must separate out the personal miles. Business driving includes everything from meeting with clients to running to the post office to mail a parcel.
Rules for Employees
The issue becomes more complicated if you work for someone other than yourself. Work-related miles are still deductible, but only if your employer doesn't reimburse you through an accountable plan. An accountable plan is one that requires you to give your employer a record of your work-related driving expenses, and you must pay back any money he gives you that exceeds your actual costs. These reimbursements don't appear on your W-2, so you can't deduct your miles. If anything your employer pays you does appear on your W-2, you can typically take the deduction. Driving to work doesn't count -- that's commuting -- but if you have to leave your work location to deal with your boss's business, these are deductible work miles. Unfortunately, if you're not self-employed, you must itemize on your return to claim this deduction and you can claim only the amount that exceeds 2 percent of your adjusted gross income.
The IRS offers two options for deducting work-related auto expenses. You can use the actual expense method rather than deduct 55.5 cents a mile, but this may not be to your advantage if your vehicle isn't a gas guzzler. With the actual expense method, you can deduct a wide range of costs, including gas, maintenance, insurance and even depreciation of the vehicle. As with the mileage method, you must segregate your business use of the car from your personal use, then deduct a percentage of your overall automobile expenses based on the percentage of time you drive your car for work. If it costs you a lot to keep your vehicle on the road all year, you might be better off taking a percentage of your overall expenses -- this method might add up to a larger deduction.
Regardless of which method you choose, parking fees and tolls are deductible as well. As with other expenses, they must be business-related. If you rent an office in a building where you must pay for parking, and the office is your principal place of business, the cost isn't deductible. If you have to pay to park at a client's business location, it is. Tolls count only if you're en route to a business engagement.
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