We use our cars for a lot of things: getting to work, taking the kids to soccer practice, going on vacations to your destination of choice.
But can they save you money, too?
You might not think about it, but using your car for different reasons can result in a lot of tax deductions. Personal use doesn’t count – you won’t save money just by running errands – but there are a lot of other times when your travel costs can be written off.
Here are four instances when using your car can lower your tax bill when you file in April.
Standard mileage versus actual expenses
Before we kick things off, it’s important to understand if you’re going to make deductions based on standard mileage rates or actual expenses.
With standard mileage rates, the IRS sets the amount per mile you’re able to deduct. These typically change from year to year. For example, this year you can deduct 54 cents for every mile driven for business purposes. It’s a flat rate, and all you have to do is keep track of your mileage.
Actual expenses, on the other hand, are just that: the real expenses you incurred for using your vehicle for something other than personal use. Maintenance costs, gas, insurance, and parking fees count toward this. That means that you need to keep track of all of these expenses and have the exact costs tallied up when you’re filing your taxes.
So which one should you choose? Ideally you’d pick whichever one will get you a bigger deduction, but standard mileage is much easier to track and calculate so many people opt for that. It’s up to you to decide if you want to track all of your expenses – or if you even can, depending on how diligent you’ve been throughout the year – and how much the deduction is worth to you.
When you’re your own boss, doing freelance for self-employed work, you get to write off a lot of things related to your business. What sorts of things? All of these, for example.
(Go ahead, take a look. We’ll be here when you’re all caught up.)
Since being a freelancer means that you’re often on the go, meeting with clients instead of going into the office every day, you’re able to deduct your travel costs. Going to meetings, worksites, or conferences can add a lot of miles to your vehicle quickly, but as long as you’re traveling for work you can write those off using either the actual expense or the standard mileage to offset the wear and tear.
And the standard mileage rate is nothing to sneeze at: for 2016 it’s 54 cents per mile; that’s down from 2015’s 57.5 cents per mile but it’s still a lot (and, as you’ll see in a bit, a lot higher than you’ll get for other uses) and could mean a huge difference in what you send to Uncle Sam.
Now you might be thinking that freelance work provides a good living, but maybe not enough that you have a separate car just for work. How do you separate your work cost from your personal use?
It really comes down to knowing when you’re on the job and when you’re not, keeping records of work trips (a mileage log helps a lot for keeping things straight), and, most importantly, being honest. Don’t try to write off that trip to the beach if you weren’t meeting a client. Lying will probably bring on bigger headaches that aren’t worth the deduction you’re trying to sneak in.
Your new job
Let’s say you’re stuck working for The Man instead. Good news: you might be eligible for a tax deduction while you’re looking for a new job and once you get it.
Job search costs are deductible as long as it’s for a job in your current line of work and you aren’t looking for an entirely new career.
There are a lot of resume prep companies out there, and you can deduct the cost of getting your resume up to snuff. Most job applications take place online so you’ll likely be filling out a form or emailing your resume, but if you need to send it snail-mail, that’s deductible, too. And travel expenses for when you’re looking or heading out to an interview can be written off.
You cleaned up your resume, nailed the interviews, got a few nice tax deductions, and finished it all off with an offer letter. Congrats! Now you might be able to save even more once you accept, as long as you meet these three requirements:
- Your move closely relates to the start of work
- You meet the distance test
- You meet the time test
"Closely" counts in terms of time and location. You can count a move as long as it happens within a year of starting a new job and is closer to your job than where you’re moving from was.
To pass the distance test, your new work has to be "50 miles farther from your old home than your old job location was from your old home."
Finally, you have to work full-time, at least 39 hours a week.
So, did you pass? If so, you can write off some of your moving expenses – and this includes vehicle travel "if you use your car to take yourself, members of your household, or your personal effects to your new home."
You can write off the standard mileage or the actual expenses, just like with business use. This time, though, you don’t get quite as big of a deduction: the 2016 standard mileage rate is 19 cents for moving expenses, compared to business use’s 54 cents.
"Medical expenses? What, like if I drive an ambulance?"
That probably wouldn’t count, but that’s not what we’re talking about here anyway. You can deduct vehicle cost if you’re using it to treat a medical condition for yourself or one of your dependents.
In most cases, this covers your actual travel costs for care – going to see a specialist for treatment or heading to a conference directly related to your illness or care. But you can also write off parking costs if you’re spending a lot of time in a hospital.
Again, you can deduct the actual expenses or the standard mileage rate which, like 2016’s relocation rate, is 19 cents per mile.
Oh, and one last trick: if you have a flexible savings account, you can use that money to pay off your qualified travel expenses!
Giving is its own reward, but charity also has a secondary benefit of lowering your tax bill. Your car can help with this in two different ways.
First, you can donate the car itself! You might know that you can write off donations, and your car is no different. Especially if you think you won’t get a lot by selling, it you can donate it and at least get something back, all while making a difference.
The amount you can write off depends on what the charity does with the vehicle. If they sell it at an auction, you can write off the amount they sold the vehicle for. But if the charity keeps the car and uses it, you can deduct its market value.
The other way your car can help with deductions is if you use it to do charitable work yourself. So when you head out to Habitat for Humanity or to a soup kitchen, it’s similar to a freelancer going to see a client, which means it pays off for you.
The standard mileage rate for charitable work is only 14 cents for 2016 – lower than the others on this list – but if you’re doing stuff for charity, the tax break shouldn’t be your prime motive, but rather an added benefit to helping those less fortunate than yourself.
There are a lot of opportunities to get tax deductions, but there are also a lot rules for what and when you can write off. If you’re not sure if an activity warrants a deduction, check with a tax professional, who will be able to sort out the details and save you every penny you deserve.
Image: Russ Hendricks