The uprisings in the Middle East are nothing short of historic — the Islamic world's equivalent of the Berlin Wall crumbling before our eyes. While countries like Tunisia, Egypt, Libya, Bahrain, and Yemen may not be ready for our style of democracy, their citizens are enjoying the hope, and promise, and even a first taste of the freedoms our own forefathers shed blood to secure for us.
But can you believe that the uprisings in the Middle East — especially the conflict in Libya — may actually work to cut your tax bill?
Libya produces just 2% of the world's oil, and most of it goes to Europe. But Libya is one of the primary sources of "light sweet crude," and worldwide production is near full capacity. So the rebellion against Qadaffi has sent prices surging nearly 30% — way out of proportion to Libya's actual impact on the world's oil supply. Prices are super-sensitive to the news, and twitch with each new development. On March 20, for example, prices jumped $2/barrel after western forces began enforcing a "no-fly zone." The very next day, they fell $3/barrel in just 15 minutes after Libya's foreign minister declared a cease fire. And of course, oil prices drive gas prices here in America — an extra dollar per barrel means an extra 2.4 cents for every gallon.
Why does this matter? Well, higher gas prices, in turn, affect your taxes — depending on how you handle them. You have two choices for deducting car and truck expenses:
•You can take a standard mileage rate the IRS issues for all vehicles. Right now that allowance is 51 cents/mile for business, 19 cents/mile for medical or moving purposes, and 14 cents/mile for charitable purposes. It was announced on last December 3, when the average price of gas was around $3.00.
•Alternatively, you can deduct your actual expenses for operating your vehicle. Those expenses include the actual price you pay for gas, which now averages $3.60 nationwide. (The "actual expense" method also lets you deduct more if you drive a big honking SUV than if you drive a fuel-efficient compact or hybrid — something the standard rate doesn't allow.)
Bottom line: Qaddafi balks at giving up his "throne." Oil prices shoot up. You pay more to fill up your family truckster. But you get to deduct more. So you pay less tax!
Uh oh . . . what's wrong with this picture?
Well, there's a reason you get to deduct more, and that's of course because you pay more. If you're in the 25% tax bracket, a $3.00 gallon of deductible gas costs $2.25 after tax. A $3.60 deductible gallon costs $2.70. Who cares about saving 15 cents more in tax if it means paying 45 cents more per gallon? Paying less tax isn't always a good thing if it's because you're making less!
It's easy to applaud Libya's movement towards democracy. It's harder when we realize how much that movement costs us at the pump. How high do you think gas prices will go? Do you think they'll go higher than they did in the aftermath of Hurrican Katrina?
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