Editor’s note: As of May 1, 2009, the IRS mileage rate is 30 cents per mile.
DO YOU USE your car for business? Hate keeping records of the actual expenses you pay for the business use of your car? There’s another way to deduct the business use of your car. The optional mileage allowance method is the name of this game.
Use this method and keeping records of each auto expense is history. Instead, only two simple tasks capture your deduction: Keep track of the business miles you drive and then apply the IRS mileage allowance rate. Every year the IRS announces the rate for the next year. The rate may go up, down or stay the same. The rate for 2004 is 37.5 cents per mile; up from 36 cents in 2003 (as of May 1, 2009, the rate is 30 cents per mile).
Here’s an example. Sue Sellstuff drives her auto far and often for business every year. For 2004 Sue keeps track of only business miles. Suppose she drives a total of 30,000 business miles in 2004. How does Sue figure her auto expense deduction? Just multiply the 30,000 miles by 37.5 cents. Sue’s 2004 deduction is $11,250.
But wait. Sue also can deduct 100% of her business tolls and business parking.
Caution: The mileage allowance is not always your best tax bet. Take advantage of it only if you have neither the time nor the inclination to keep those expense receipts, or if past practice shows that your total actual expenses (including depreciation) are less than the allowance amount. If your actual expenses are more than the allowance, you must decide if the reduced record keeping (mileage only) is worth the smaller deduction. The more miles you drive, the more likely the mileage allowance will save you tax dollars, as well as time.
A few more things you should know. The 37.5 cents per mile includes depreciation. So instead of computing depreciation separately, 16 cents (of each 37.5 cents) is assumed to be depreciation. When you sell or trade your car, you have reduced your tax basis by 16 cents for each mile you used the optional method. Starting in 2004, the optional mileage allowance method can be claimed by firms with up to four vehicles that are being used at the same time. A welcome simplification.
As usual, the IRS falls short when giving a tax break. The rate for a car operated in connection with charitable activities remains unchanged at a lowly 14 cents per mile. For medical expense and moving expense deductions, the amount has been boosted to 14 cents, up from 12 cents.
Strategies for the little guy
Traditionally, when this column attacks an estate tax problem, it uses real-life examples and big dollar numbers. Why? Because the larger your estate, the bigger the value of your assets and the bigger the potential estate tax liability. Our job is to kill that estate tax liability.
A question often asked by readers of this column is, “Irv, do your strategies work for the little guy?”
Let’s define little guy. You are: single and your taxable estate is $1 million or less; married and the combined dollar value of your taxable estate and your spouse’s estate is $2 million or less; and there is no chance your taxable estate will ever reach the $1 million/$2 million figure.
Taxable estate means the total value of all of your assets (including the amount of life insurance on your life), less your liabilities on the day you die.
Let’s look at a typical example. Joe, married to Mary, has no liabilities and owns the following assets: residence, $150,000; Joe’s 401(k) (Mary is beneficiary), $200,000; 100% of Joe Inc. stock, $600,000; policy on Joe’s life (Mary is beneficiary), $350,000; other assets, $200,000; and total estate if Joe dies today, $1.5 million.
Now let’s take a look at the three biggest mistakes the Joes of the world make.
The most common mistake. Joe leaves everything to Mary; and Mary does the same for Joe. This blows the benefit of a two-trust arrangement ($1 million tax-free to Joe and $1 million tax-free to Mary). Also, the first death is tax free because of the marital deduction. But the second death would force a $200,000 estate tax (assuming both Joe and Mary pass on after 2011 with their assets totaling the same $1.5 million).
The second most common mistake. Everything that Joe and Mary own — the residence, Joe Inc. stock and other assets — is held in joint tenancy. Such property automatically passes to the surviving joint tenant when the first joint tenant dies. It makes no difference what you put in your will or trust. The estate tax disaster? The same as mistake No. 1 above — $200,000 to the IRS.
The most common mistake when dad wants one or more of the kids to eventually own the business. Joe sells the business to his son Sam. (This tax blunder is not limited to little guys. Multimillionaires are just as guilty.) What’s the tax result? Joe must pay a capital gains tax on the profit when selling his Joe Inc. stock.
Joe, in real life, had all his assets in joint tenancy (as in mistake No. 2 above). So his after-capital gains tax on the $600,000 sale of the Joe Inc. stock, he would have been hit with a second tax: estate tax (about $190,000).
What did we do?
First mistake. We used a two-trust arrangement so the first $2 million of Joe and Mary’s wealth was protected.
Second mistake. We dumped the joint tenancy. We divided their assets so Joe owned about half the assets in his name, Mary owned the other half in her name.
Third mistake. Joe did not sell the business to Sam. He left it to Sam in his will. No tax — income, capital gains or estate — to Joe. No cost to Sam.
Irving Blackman is a partner in Blackman Kallick Bartelstein, 10 S. Riverside Plaza, Suite 900, Chicago, IL 60606; tel. 312/207-1040, or via e-mail at [email protected].