Higher fuel costs prompt unusual mid-year change for second half of 2008

By ANDREA COOMBES
MarketWatch
June 26, 2008 4:06 p.m.

SAN FRANCISCO-- The rising cost of gas prompted the IRS to increase the standard mileage-rate deduction for business-related driving for the second half of 2008, the tax agency announced Monday.

The rate will increase to 58.5 cents a mile, up 8 cents from 50.5 cents a mile now, for business miles driven from July 1 through Dec. 31 this year, the IRS said.

Generally, the IRS changes the rate just once annually, but gas costs prompted a mid-year hike this year. The average national price for a gallon of unleaded regular was $4.10 on Friday, according to the Lundberg Survey of 7,000 U.S. retail outlets.

"Rising gas prices are having a major impact on individual Americans. Given the increase in prices, the IRS is adjusting the standard mileage rates to better reflect the real cost of operating an automobile," said Doug Shulman, the IRS commissioner, in a press release. "We want the reimbursement rate to be fair to taxpayers."

In 2005, the IRS also raised the rate in the middle of the year, and also by 8 cents per mile -- at that time the steepest one-time hike ever -- because of the gasoline-price hikes related in part to Hurricane Katrina. That increase brought the mileage rate to 48.5 cents for the rest of that year. It fell to 44.5 cents in 2006, and rose back to 48.5 cents in 2007.

To determine the mileage rate, the IRS hires an independent researcher to analyze driving costs, including fuel prices, car maintenance and registration. Taxpayers can opt to use the standard mileage rate or they can keep track of their expenses.

The standard mileage deduction is limited to companies using four or fewer vehicles. For larger companies ineligible to take the deduction, the IRS standard mileage figure is widely used as a benchmark in setting reimbursement rates for employees' driving expenses.

Medical, moving rate also increased

The standard rate for deducting miles driven for medical or moving purposes will also increase by 8 cents to 27 cents a mile, up from 19 cents for the first six months of 2008.

The altruistic will find no added relief: The rate for driving related to charitable purposes, a rate set by Congress, remains at 14 cents a mile.

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