IRS raises mileage deductible rate 8 cents

Increase as of July 1 is meant to help workers meet skyrocketing gas prices

June 24, 2008|By Hanah Cho and Lorraine Mirabella | Hanah Cho and Lorraine Mirabella,Sun reporters

Many motorists believe that every little bit counts when it comes to gasoline prices.

Recognizing the skyrocketing gas prices consumers are facing at the pumps, the Internal Revenue Service announced yesterday that it is raising the standard mileage deductible rate by 8 cents to 58.5 cents a mile, a rare midyear adjustment by the federal agency.

The new optional rate goes into effect July 1 and is scheduled through the end of the year. Workers who use their vehicles for business can use the standard mileage rate or deduct their actual expenses on tax returns. The federal government and many private employers use the IRS rate when reimbursing workers who use their cars on the job.

"Anything that's going to help increase my bottom line is good news, even a small amount," said Gale McClelland, president of Home Appraisal and Inspection Services in Towson.

McClelland spends much of her day driving around Central Maryland to do real estate appraisals, sometimes up to 100 miles a day and at least 400 miles a week. Her business is already hurting from the slowdown in real estate sales, and rising gas prices have only made it tougher. She pays, on average, about $4.26 a gallon for premium gas.

The IRS traditionally sets the rate each fall for the following year, but the federal agency said it made a special adjustment to account for rising fuel costs.

The price of regular gasoline nationwide is $4.07 a gallon, up from $2.98 a year ago, according to AAA Mid-Atlantic. In Maryland, it costs on average $4.05 a gallon, up from $2.96 a year ago.

"Rising gas prices are having a major impact on individual Americans," IRS Commissioner Doug Shulman said in a statement.

"We want the reimbursement rate to be fair to taxpayers," he said.

The last time the IRS changed the mileage rate midyear was in 2005, when Hurricane Katrina caused a temporary disruption in the gas supply. The agency increased the rate by 8 cents to 48.5 cents in September of that year, but readjusted it to 44.5 cents in 2006 when gas prices stabilized.

Besides the business mileage rate, the IRS also yesterday increased the mileage rate for deductible medical or moving expenses to 27 cents a mile, up 8 cents.

The rate for providing services for charitable organizations, which is set by Congress, remains at 14 cents a mile.

Eileen Levitt, president of The HR Team, human resources consultants in Columbia, said she plans to follow the agency's lead and increase the mileage rate from the current 50.5 cents per mile.

The new rate will help her 11 employees, who have been shying away from visiting clients because of increasing travel costs, she said.

At the same time, the mileage rate increase adds to her ever-growing costs of running a business.

"I can't nickel-and-dime my employees," Levitt said.

Some workers like Dean Morekas are deducting their actual driving expenses, such as gas and insurance, instead of taking a per-mile write-off.

Morekas, a home inspector for Land America Property Inspection Services who works mostly in the Baltimore area, said he switched from the per-mile rate because he drives about 20,000 miles a year for business.

"I'm not paying much attention to that," Morekas said of yesterday's announcement. "Obviously, gas is always part of the expense of business, but you can't be raising prices [for clients] to keep up. We're trying to still be competitive in the industry and keep rates as low as possible, but you can't make up the difference easily."

Since the IRS mileage rate is optional for employers, workers can deduct the difference on their tax returns as a miscellaneous itemized deduction, said Mark Luscombe, a principal analyst for the tax and accountant group at CCH Inc., an Illinois-based tax information provider.

But there's a catch, he said.

The total of such deductible expenses has to exceed 2 percent of adjusted gross income.

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