Tax Tips Car Used On Business Can Drive Up Your Deductions
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Written by Steve R. Lowry
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Monday, 09 February 2009 |
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If you're self-employed and use your car for business, you're probably experiencing severe gas pains. But at least you can deduct those costs when you file your taxes.
The IRS offers two choices for deducting business-related miles: actual costs or the standard mileage rate. With the actual cost method, you claim all the expenses associated with operating a car for business, such as gas, maintenance, repairs and oil. If you use your car for business and non-business excursions, you can deduct only the percentage of miles that were business-related.
With the standard mileage allowance, you multiply the number of miles traveled for business by the IRS mileage allowance. For 2005, the standard mileage allowance is 40.5 cents per mile. If you drive 1,000 miles for business this year and use the standard mileage method, you'll deduct $405.
Many self-employed workers use the standard allowance because it's easier to calculate. "All you have to do is substantiate what you traveled," says Donna LeValley, contributing editor of J.K. Lasser's Your Income Tax 2005. "Keeping a travel log should satisfy the IRS, as opposed to keeping all those receipts."
But with gas prices soaring, some frequent drivers might get a bigger tax break by using the actual cost method. Gas prices have risen more than 34% since November, when the IRS announced the standard mileage rate for 2005. This year's higher prices will be figured into the allowance for 2006, but that won't help offset higher gas prices in 2005.
If this is the first year you're using your car for business, go with the standard mileage deduction. That gives you the option of switching methods at a later date. If you use the actual costs deduction the first year, the IRS requires you to use that method for as long as you use the car, says Mark Luscombe, federal tax analyst for tax publisher CCH.
Other potential driving deductions:
- Moving expenses. If you change jobs this year, you might be eligible to deduct your moving expenses, including transportation costs. The 2005 standard allowance for moving expenses is 15 cents per mile.
- Medical expenses. Deductions for medical expenses are limited to costs that exceed 7.5% of your adjusted gross income. If you manage to breach that threshold, you can deduct the cost of traveling to a hospital or doctor's office. The standard mileage rate for medical expenses is 15 cents per mile.
- Volunteer work. Taxpayers who use their cars for charitable purposes and itemize on tax returns are eligible for a tax deduction. The standard allowance for volunteers is 14 cents per mile.
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Last Updated ( Monday, 09 February 2009 )
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