If you are one of those drivers who drive extra miles just to keep your taxes down, I have one thing to say:
Just….. Stop it.
Don't be an idiot. Don't do it!
Is there a way I can say it more clearly?
Every mile you record ONLY reduces the tax bill for most drivers by 9 cents a mile.
58 Cents a Mile Deduction does NOT equal 58 cents a mile tax deduction.
It's bad math, people. Stop spending money to save even less.
Understand how taxes work on your deductions
The first thing you have to understand is, expense deductions to not mean an equal amount of tax savings. $10,000 in business expenses does not equal $10,000 in tax savings. 58¢ in deductions do not equal 58¢ in tax savings.
Don't get me wrong here. I'm not saying don't track your expenses. You absolutely need to. But don't spend money to save money when the savings is less than you spend. Understand how your taxes work as an independent contractor.
You are taxed on your profit. The tax is a percentage against that taxable amount. When you claim a business expense on your Schedule C – that only reduces your taxable income. It does not reduce your taxes in the same way. Sometimes it doesn't even reduce your taxes.
Here's an example.
Say you made $20,000. You figure out you owe 15% on that 20,000 (after some rounding). The taxes you owe total $3,000.
But then you realize you forgot to figure in your mileage. You drove 17,241.38 miles (okay, you probably won't track to the hundredth of a mile like that, but it gives us a nice round number) and that means you get to write off $10,000 of mileage expenses.
That doesn't reduce taxes by $10,000. It reduces TAXABLE INCOME by that amount.
That means your taxable income is now $10,000.
And that means your taxes are now $1,500. Those 17,241.38 miles reduced your taxes by $1500.
Now any tax reduction is a good thing
This is why you MUST track every mile. $1,500 is a lot of money. Every mile you fail to track, every expense you fail to track, adds money to your taxes. TRACK EVERY EXPENSE!
But here's what I'm getting at:
Those savings only equal 9 cents a mile off your taxes.
Let that sink in a minute. You maybe didn't realize that was THAT low. You keep hearing everyone chirping on 58 cents….
That is because your miles only reduce taxable income, so that 58 cents only saves the percentage equal to the tax rate you are paying.
58 cents at 15.5 percent is 8.99 cents. We'll just round up to 9.
Now I use the 15.5% because that's the self employment tax rate. A good share of drivers have enough miles and expenses that they often haven't earned enough for income tax. Once your profits out-earn your standard or itemized deductions, the very next dollar and up is taxed at 12%. At that point, your tax savings is about 16 cents per mile. That's better, however…
Your Tax Savings Are LESS Than Your Cost of Operating Your Car.
I'm sorry, but it's not costing you less than 9 cents a mile to run your car. It's not even costing less than 16 cents. Your car costs more than just gas. Understand the actual cost to operate your car, it's most likely 30 cents a mile AT A MINIMUM.
When you drive just to reduce taxes you are spending 30 cents to save 9.
Seriously, is that a good idea?
Let's use the example above. Larry the Cucumber earned $20,000. He drove the 17,241 miles, got $10,000 deduction, but still owes $1500 in taxes. He decides to just drive around between deliveries, and after driving $17,241 MORE miles, he now has zero taxable income. He saved money. Larry's brilliant, right?
No, Larry's an idiot.
But Larry's got a great new Hybrid that gets 50 miles to the gallon. He only used 345 gallons at $2.50 per gallon, so that's $862.50. So he saved $700, right?
Except Larry's new hybrid lost a TON of value because of those miles. And Larry had other expenses due to wear and tear and maintenance. And Larry's got a bunch of other costs coming up much quicker because of all those miles. In fact, Larry's new Hybrid costs him 45 cents a mile once everything is taken into account.
So bascially it cost Larry $7,750 total to drive those miles.
All to save $1500.
Do you get the math here?
Don't. Be. That. Cucumber.
The bottom line is simple: It costs you more to run your car than you save in taxes. Seriously, would you rather have the 30 cents (since you didn't have to spend it driving around) and pay 9 cents taxes – meaning you still have 21 cents… or would you rather be out the 30 cents, but then save 9 cents (which means you're still 21 cents in the hole)?
Use good math here.
Driving enough miles to not pay taxes also means you really didn't make any money.
Folks, we do have a sweet little perk as independent contractors, where in this one area for most of us we CAN Write off more than our actual expense. If you've done a really good job selecting your car, you can get as low as 30 cents, in rare instances as low as 25 cents a mile actual expense. I just can't see you getting much less than that.
But here's the deal. Say you drove 34,500 miles and made $20,000. You get to write off every penny. That's awesome, no taxes.
But once you figure in your ACTUAL expense, you still only made $10,350 (IF you were as low as 30 cents a mile). While it's awesome that you can make that much actual profit and not have to pay taxes… that's still basically half of what you originally earned. If you feel good that you earned $15 per hour, that means you actually only profited $7.50 per hour.