Your daily commute tends to be a grind, not just on your overall well-being but also on your wallet. When you consider the costs for gas, maintenance, parking, car insurance, and toll roads, commuting can burn a hole in your pocket fairly quickly. Luckily, carpooling – or ridesharing – can help offset these expenses through qualified transportation fringe benefits.
Is there a tax break for carpooling?
What are qualified transportation fringe benefits?
The IRS classifies carpooling and other commuter expenses (e.g., parking, transit passes, bicycling) as qualified transportation fringe benefits. These benefits are not taxed as income.
There are two ways an employer can cover these transportation expenses:
- Giving employees extra money to cover necessary transportation expenses (a.k.a. a subsidy)
- Pre-tax withholding
With pre-tax withholding, you can request to have a percentage of your taxable income set aside to pay transportation expenses. Pre-tax withholding is a win-win situation: Your employer saves money on payroll taxes, while you save on federal income taxes.
Is a transportation allowance taxable?
As an employee who carpools, you can receive up to $260 a month to cover transportation expenses tax-free, but only if your car qualifies as a “commuter highway vehicle.” Your vehicle must accommodate at least six adults – not including the driver – and half of the passengers need to be employees. Additionally, 80% of the vehicle’s mileage should be used commuting between an employee’s home and the workplace.
If you work downtown where free parking is usually unavailable, you can also exclude up to $260 a month from your taxable income to pay for parking expenses. When you combine this with the commuter highway vehicle benefits, you can receive up to $520 per month. Of course, check with your employer to see if they offer these fringe benefits. Some areas such as San Francisco, California require employers to provide these pre-tax benefits to their employees.
Other Benefits of Carpooling
While you can’t itemize commuting expenses on your tax return, you’ll still save money in the long run when you opt for carpooling. Even sharing a ride with just one co-worker can cut everything in half from fuel costs to toll fees. If you and your co-workers take turns driving, your car’s lifespan will extend tremendously. This means you won’t have to pay maintenance costs – oil changes, new tires, inspections, etc. – as often, saving you hundreds of dollars each year.
The Bottom Line
If you’re serious about saving money, consider organizing a carpool. The first thing you should do is check if your employer offers qualified transportation fringe benefits. If not, see if it is willing to provide a subsidy for your transportation costs. Even if that doesn’t pan out, you’ll still be doing your wallet a favor by taking the carpooling route.
The information in this article was last edited on September 20, 2021.