What the half-cent drop in the standard mileage rate means for drivers

Per the IRS’s announcement this week, the standard mileage rate for 2017 is 53.5 cents per mile—a $.005 drop from 2016.

After a relatively sizeable change last year (from 57.5 cents per mile in 2015 to 54 cents in 2016), those who drive for work are in more or less the same situation as 2016.

So how much of a difference does this $.005 really make?

First, let’s look at who uses the mileage rate

Self-employed taxpayers who drive for work can deduct driving expenses from their business income (lower taxable income = paying fewer taxes).

Drivers have the option of deducting either: 

  1. Their actual car expenses, like the cost of gas, maintenance, insurance, car payments, and depreciation, or  
  2. A standard amount for every mile they drive. 

Option 2 is called the standard mileage deduction, and it usually saves drivers more money at tax time than itemizing all car expenses—As it turns out, the standard mileage rate is pretty generous unless you drive a gas guzzler (more on that below).

Why did the rate change?

The IRS calculates the standard mileage rate based on the average costs associated with owning and operating a vehicle. They take into account are the average prices of gas, car insurance, maintenance expenses—basically everything you have to pay for when you own a car.

Since the mileage rate went down, that means the IRS determined that owning a car is less expensive now than it was last year.

And they’re probably right. While insurance and maintenance costs have risen, gas prices have fallen. The changes have almost cancelled each other out, resulting in only a $.005 change.

What does this mean?

In short—not much.

A smaller mileage deduction will mean that if you drive about the same amount in 2017 as you did in 2016, you will not be able to deduct as much from your business income.

Since your deductions will be smaller, your reported income will be higher even though you worked the same amount. And higher income means you pay more in taxes, because you have more taxable income.

The good news is, the mileage rate decrease isn’t large enough to substantially increase your tax liability.

For example, if you drove 10,000 business miles in 2016 and expect to drive about the same amount in 2017, here’s what your mileage deduction would look like for both years:

2016: 10,000 x .54 = $5,400 deduction

2017: 10,000 x .535 = $5,350 deduction

Your deductions decreased by…$50. If we assume a 30% tax rate, this decrease means you might pay $15 more in taxes compared to last year.

How much more will I have to pay in taxes?

Well, it depends on a lot of factors—your tax bracket and how much you actually drive in 2017, among others.

But if we assume that your self-employment income is taxed at a 30% rate, that extra $50 means an extra $15 in taxes. So basically, your tax liability increased by the cost of coffee for a week.

If the mileage deduction is smaller, should I switch to the actual expense method?

Probably not. Actual car expenses rarely outweigh the standard mileage deduction. Drivers of smaller cars who drive 15,000 miles per year can deduct 22% more with the standard mileage deduction than with the actual expense method.

AAA’s 2016 study of cost per mile showed a $.439/mile cost for small sedans driving 15,000 mile per year.

If cost per mile in 2017 stays about the same—which the IRS expects it will—then a rideshare driver who drives 15,000 miles per year (about 288 miles per week) would deduct $6,585 in car expenses, but could deduct $8,025 using the standard mileage deduction. That’s a 22% deduction increase.

On top of the deduction change, the actual expense method involves a lot of work. You’d need to meticulously track all of your car expenses throughout the year, which usually results in a few mistakes that cost you a lot in deductions.

The actual expense method is only better than the standard mileage rate if your actual car expenses are pretty high. If you spend a ton on gas, and your car payments are high, then there’s a chance you should be using the actual expense method. However, the 2017 mileage rate change will likely not be the tipping point in your decision.

Bringing it all together

If your mileage deduction is smaller, then your income is higher. The higher your income, the more you pay in taxes. The thing is...we don’t expect your tax liability to increase all that much.

The smaller deductions you’re probably forgetting to claim from music and paid apps to cell phone expenses and food that we make easy for you with Stride Tax will probably have a greater impact on your taxes.

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