Generally, the IRS sets the mileage rate for taxes once per year in December. Gas prices go up and and down through the year, but the mileage deduction rate is not adjusted monthly or quarterly.

However, the IRS increased the optional standard mileage rates for the last six months of 2011 citing, “increased gas prices … having a major impact on individual Americans.” The 2011 IRS mileage rate increased to 55.5 cents per mile from the original IRS 2011 mileage deduction rate of 51 cents, which still applies to the first six months of 2011.

In other words, when you figure out your income tax deductions for your 2011 taxes in 2012, you’ll have to use two different mileage rates to get the correct deduction for miles driven for business purposes. As always, the IRS requires contemporaneous driving records in order to deduct the mileage on your taxes. Using those records, taxpayers will multiply each deductible mile by 51 cents for trips between January 1st and June 30th and 55.5 cents per mile for trips between July 1st and December 31st.

The standard IRS mileage rate is the one for business purposes. However, there are two other cases where you can deduct mileage.

Certain miles driven for medical purposes or for moving purposes may be deducted. The rate for this deduction was 19 cents per mile at the beginning of 2011. The mileage rate increases to 23.5 cents per mile for the second half of 2011.

Miles driven for charitable purposes can also be deducted in some cases. Mileage for charity is deducted at the rate of 14 cents per mile. The charitable mileage rate was not increased by the IRS.

Income tax deductions for mileage may be computed in two ways. The most commonly used method uses the standard mileage rate set by the IRS. The deduction is computed by multiplying the standard rate times the number of miles driven.

However, taxpayers may also deduct the actual costs of operating a vehicle. Doing so, requires drivers to keep all receipts for fuel and maintenance and then to computer the vehicle’s depreciation. Most people forgo this extra effort and just use the mileage rate.

Most American companies use the IRS mileage rate for reimbursing employees for miles driven on behalf of the company. There are two main reasons for this. First, companies deduct the money they reimburse to employees as a business expense. The IRS can’t complain the company is using too high or too low of a rate if it is using the same one as the IRS. Second, companies are shielded from employee complaints about the rate being too high or too low by saying that they are not responsible for the rate and that the IRS sets it.

However, there is no automatic requirement that companies raise their 2011 mileage reimbursement rates just because the IRS made a mid-year increase in the rate.

Check with your company to verify what your reimbursement mileage rate should be for the rest of 2011.

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