The Internal Revenue Code allows some worthwhile tax breaks for transportation-related employee fringe benefits. They’re intended to persuade you to give up your gas-guzzling vehicle when commuting to work and instead “go green.” If your employer offers these tax-favored benefits, you should consider signing up. Here are the specifics.

Favorable Tax Treatment

The employer-provided benefits explained in this article are generally treated as tax-free fringe benefits. That means their value, within certain limits, won’t be included in your taxable salary. And you won’t owe any federal income tax, state income tax (if applicable), Social Security tax or Medicare tax on the value of these benefits.

If your company isn’t prepared to pay for these fringe benefits, it may instead allow you to set aside part of your salary to pay for them. This is a so-called “salary reduction arrangement.” It works the same way as salary reduction contributions to your 401(k) plan. The amount of salary you set aside to cover transportation fringe benefits is subtracted from your taxable salary. So, you won’t owe any federal or state income taxes or any Social Security or Medicare taxes on the amounts you set aside, within the prescribed limits.

In effect, a salary reduction arrangement allows you to pay for your commuting costs with pretax dollars rather than paying for them with what’s left after taxes. There are three categories of transportation expenses that may qualify for this favorable tax treatment.

1. Parking Allowance

Employer-provided parking allowances are tax-free up to a monthly limit of $255 for the rest of this year. (This limit could be slightly higher next year due to an inflation adjustment.) If your company doesn’t pay for this fringe benefit, it might instead offer a tax-saving salary reduction arrangement.

How much can you save in taxes with the parking allowance fringe benefit? Suppose you set aside the maximum $255 a month to pay for parking. If you’re in the 25% federal income tax bracket, you would save $999 in federal income, Social Security and Medicare taxes over 12 months. You might also reap some state income tax savings, if applicable.

2. Transit Passes and Van Pooling

Through the end of this year, employer-provided mass transit passes for train, subway and bus systems are tax-free up to the same monthly limit of $255. (Again, the limit for next year could be slightly higher due to an inflation adjustment.)

Employer-provided van pooling is also tax-free up to the same monthly limit of $255. A few years ago, this benefit was more common. But the concept never caught on, because it’s inconvenient for many riders. Moreover, it requires employers to comply with some burdensome tax rules and contend with liability issues. That said, if your company offers van pooling and it works for you, consider signing up.

You can receive the $255 tax-free transit pass or van pooling benefit on top of the tax-free $255 a month for parking. For example, you could receive $255 a month to pay for the train plus another $255 to pay for the park-and-ride pass at the train station. Or you can simply drive to work and take advantage of the $255 parking allowance to park near the office.

If your company doesn’t pay for these benefits, it might offer a tax-saving salary reduction arrangement instead. For example, say you set aside $255 a month for train passes and another $255 for the park and ride. If you’re in the 25% federal income tax bracket, you would save $1,998 a year in federal taxes. If your tax bracket is higher, the tax savings go up.

Important note: The Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently equalized the maximum tax-free monthly benefit for parking allowances, transit passes and van pooling. Without this change, the maximum monthly tax-free benefit for transit passes and van pooling would have been only $130 for 2016. So the PATH Act gives you an extra incentive to sign up for employer-provided transportation fringe benefits or a salary reduction arrangement that covers transportation costs.

3. Bicycle Commuting Allowance

Last and least, your employer can give you up to $20 a month tax-free to cover buying, repairing and storing a bicycle that you regularly use to commute to work. It’s not much, but it’s better than nothing if you’re a cyclist. You can’t, however, use a salary reduction arrangement to pay for bicycle commuting costs with pretax dollars.

Small Effort, Big Payback

The favorable tax treatment of these transportation fringe benefits is available to all employees, regardless of how much they make. If your company pays for transportation fringe benefits or offers a salary reduction arrangement, consider signing up. Doing so typically requires minimal paperwork and the tax savings can be significant. And, the higher your tax bracket, the more you can save.

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Brought to you by: McClanathan, Burg & Associates, LLC