The information in this article is up to date through tax year 2019 (taxes filed in 2020).
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.
Qualified Transportation Fringe Benefits
Under Section 132(f) of the Internal Revenue Code, the Internal Revenue Service classifies carpooling and other commuter expenses as qualified transportation fringe benefits. There are two ways an employer can cover these transportation expenses, which can include costs for parking, carpooling, transit passes and bicycling. One way an employer can do this is by providing a subsidy. This gives an employee extra money – which is not part of his or her taxable income – to cover necessary transportation expenses. The more common approach employers take, though, is pre-tax withholding. An employee can request to have a percentage of his or her taxable income set aside to pay transportation expenses. This is a win-win for both parties. Employers save money on payroll taxes, while employees save on federal income taxes.
As an employee who carpools, you can receive up to $260 a month to cover transportation expenses, 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.