Commuter Tax Benefit

Happy Summer, Creative Financiers!  Summer is always a good time to get your financial house in order, and I thought we’d cover an easy and often overlooked resource today- the commuter tax benefit.

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This post will mainly be for the commuters out there, and you WFH folk can just throw on another pair of sweatpants over your current pair of sweatpants and stay cozy for the time being.  But who knows?  Maybe you’ll be commuting again in the future and find this information useful.

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Perhaps it’s possible that you’ve vaguely heard of the commuter tax benefit before.  I was offered the chance to sign up years ago at a restaurant job, along with a 401k plan.  Unfortunately I was younger than springtime and not quite the wise Old Deuteronomy I am today, and passed on taking advantage of both.  But maybe this post will reach someone out there with the same set of options in front of them, and arm you with the knowledge you need to take advantage and save some money!

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Invest and Snap, Ow!

What is the commuter tax benefit exactly?

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Well the IRS has a rule (publication 15-B if you care for some light reading) that essentially says a commuter has the ability to pay for certain transportation expenses with pre-tax dollars, which will help the commuter save a little money on their taxes.

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First let’s revisit that idea of “pre-tax dollars”.  Sound familiar?  We’ve talked about this before with regards to Traditional IRAs and Roth IRAs.  

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In a Traditional IRA or 401k plan, you are investing in a retirement account with “pre-tax dollars”.  That means the money you are putting in lowers your overall taxable income, which helps you save taxes today.

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For example, adjusted for inflation, Tobias Ragg makes $100,000 per year selling meat pies to the fine folk of destitute London.  Tobias works for a generous employer, Mrs. Lovett who offers him a company 401k (but with no employer match, she’s not that generous).  

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If Tobias were to invest $10,000 into his 401k each year, he’s actually reporting total earnings for the year of $90,000.  Because the $10,000 he invests into the plan is considered pre-tax money, it lowers his overall taxable income.

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So what does this have to do with commuting to work?  Well friends, the commuter tax benefit works in a very similar way.

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Another Hundred People Just Got Off Of The Train, and Saved Money On Taxes

Basically, the commuter tax benefit allows you to elect for your employer to deduct certain transportation expenses directly from your paycheck as pre-tax dollars.  This can be in the form of a monthly metrocard, NJ transit pass, monthly parking expenses, and even for Ubers/Lyfts/ or other car services you may use specifically for commuting to and from work.

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One of the reasons this topic is fresh on my mind is because I just signed up recently to use the benefit that my company offers to me!

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Through my company’s HR platform I was able to sign up for the commuter tax benefit, and have elected to have the $210 per month that my NJ transit pass costs taken out of my paycheck as pre-tax dollars.  

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I have to admit, before pulling the trigger one of my first thoughts was “but the credit card points!”.

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However it only took a very quick analysis to understand I would be better off utilizing the commuter tax benefit than raking in the points I was getting from my Chase Sapphire card.

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With my Chase Sapphire card, I get 3x points on all travel expenses.  So let’s look at that over the course of a year.

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$210 per month is $2,520 per year, which yields me 7,560 points per year on that cost alone.

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It’s been my experience that 7,560 might be enough for a cheap hotel room, something in the $70 – $90 range.  

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However let’s look at the tax savings I will now get from the commuter tax benefit.

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The $2,520 per year that I have now spent as pre-tax dollars, means that amount is deducted from my overall compensation.  

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So the tax I would have paid on the $2,520, let’s use ~30% as a round number, is about equal to $756.  Woah!

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It’s not hard to understand that $756 is a much greater number than $90, so it was a no brainer.

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Finale Thoughts

I only had two excuses for not using the commuter tax benefit all these years.

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I didn’t really know what it was, and I was a lot younger and had much less financial acumen than I have now in my early 30s.

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Guess what reader?  You have none of those excuses now after reading this post!

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It’s worth noting that the commuter tax benefit is an employer benefit, and you’re not always going to have access to it.  But a lot of businesses are required to offer it, so you should definitely ask your HR department, your management team (company management in the theatre), or whoever manages your employment, and find out if this is something you can be taking advantage of.

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One allergy I had in signing up for this benefit was the idea that the money would be taken out of my paycheck and I would never see it in my bank account.  But then the more you think about it, that ultimately doesn’t really matter.

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This commuting cost is a cost I have every month no matter what.  It’s money I know I need to spend, so I might as well get a little something (to the tune of $756) in return for spending it!

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And how do we get that money back?  Well it’s part of your taxes, and using the benefit should ultimately increase your tax return (or decrease what you owe).

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What’s the moral of today’s post?  It’s important that we take advantage of every opportunity offered to us.

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Do you commute to work and spend money to do so?  Go get that benefit dear reader.  There will be a little more money in your pocket at the end of the year as a result.