Does the Federal Tax Code Favor Driving Over Other Modes?

Tri-State looked into the tax code to see if it incentivizes automobile use. | Image: Collateral Damage

Complaints that transit is subsidized while roads “pay for themselves” have been proven again and again to be unfounded. But with taxes due in less than a month, Tri-State took a cursory look at available and recently-expired tax credits and deductions related to automobile and transit use in the federal tax code to see if the tax breaks being offered incentivized or had a bias towards automobile use. While we’re sustainable transportation advocates, not tax lawyers or accountants and information in this post does not constitute tax or legal advice, we did find that the federal tax code provides benefits to vehicle owners but offers limited incentives for taxpayers to take transit or bike.

(Note: Because we aren’t tax experts, readers should consult their tax advisers with respect to the availability of any of the benefits mentioned below.)

Current and Recently-Expired Credits and Deductions Associated with:

  • Owning or operating a vehicle:
    • Individuals who donate vehicles to charity can receive a tax deduction.
    • Individuals who are involved in an automobile crash that is not fully reimbursed by the other driver’s insurance and is not the individual’s fault may be able to deduct the unreimbursed amount.
    • Although recently expired, individuals could previously receive tax credits for the purchase or lease of certain fuel efficient vehicles and light trucks such as fuel cell vehicles, alternative fuel vehicles and hybrid vehicles. In addition, individuals can take a tax credit for qualified fuel cell vehicles serviced in 2012.
    • Individuals who drive to work are eligible to take up to $245/month in a pre-tax deduction to cover their parking expenses.
  • Commuting to work by transit/vanpool:
    • As part of the deal to advert the fiscal cliff that passed in January, transit and vanpool riders can take up to $245/month in a pre-tax deduction to cover their commute expenses. The commuter tax benefit is a retroactive fix for 2012 (when the transit tax benefit was lessened from $230 to $125) and it is not permanent, being offered only until the end of 2013. If not made permanent, the transit tax benefit will revert to a lower level comparable to previous years. Employers of those who use transit/vanpool also benefit from this deduction.
    • Transit/vanpool riders can also take up to $245/month in a pre-tax deduction to pay for their parking expenses.
  • Commuting to work by bicycle:
    • An employee can be “reimbursed up to $20/month for reasonable expenses related to commuting by bicycle.” Employers of bicycling employees can also benefit from this pre-tax deduction. This reimbursement cannot be combined with any other benefit, however. For example, if one bikes and takes transit to work, one must choose one benefit over the other.

In addition, there are certain travel tax deductions available for both personal vehicle use and transit. Some examples include travelling for business purposes and medical appointments. However, these are “miscellaneous itemized deductions” and they are deductible only to the extent they exceed 2 percent of a taxpayer’s “adjusted gross income” for federal income tax purposes, so a taxpayer’s ability to claim these deductions may be limited.

Of course, many of these transit and vehicular tax breaks can be combined. Someone who takes the train  to work, has bought a hybrid vehicle and takes a bus to his medical appointments could (all IRS conditions being met) take the transit commuter benefit, the parking benefit, the fuel efficient vehicle tax credit (when this tax credit was in effect), and deduct the cost of the bus ticket to his doctor’s appointment. And certainly, encouraging Americans to purchase more environmentally-conscious vehicles — should they live in a transit desert — is not bad policy.

However, given the many benefits of vanpooling, riding transit or biking — to the environment, to drivers on the road, to the roads themselves, and, if one is biking, to one’s personal health and to healthcare costs for the community as a whole — it’s a wonder that our taxes don’t encourage these behaviors more.

For example, a commuter cannot take the bicycling reimbursement and commuter tax credit together. This doesn’t seem fair, given that some people bike to a transit station, or some may bike a few days a week and take transit the other days.

As Congress begins discussions about reforming the tax code, the opportunity should be used to either create greater parity in the tax code for non-drivers or greater incentives to make smarter and more sustainable transportation choices.

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9 comments to Does the Federal Tax Code Favor Driving Over Other Modes?

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  • Jonathan

    I don’t think anything’s stopping you from donating your bicycle or kick scooter to charity and receiving a letter with the value for tax-deduction purposes. Great idea!

  • You are wrong to imply that the first group of deductions apply to motor vehicles but not bicycles. Actually, the rules on donated motor vehicles are more strict–deduction limited to what the charity actually sells the vehicle for–than for bicycles, where the deduction is fair market value. By the way, calling either of these significant tax benefits is a stretch, since one could always sell the vehicle or used bike and then give the cash to charity. In the good old days when people could give a carwoth $250 and claim a $2500 deduction, it was a boondoggler, but no more.

    Similarly, the casualty loss deduction is available regardlesss of why you were injured (though it is sharply limited to losses that are a large fraction of your AGI).

    Finally: Are you sure that employers can not subsidize bicycle parking? I would guess that few do, but don’t blame the tax code.

    That said, you missed the biggest tax giveway to drivers: One can deduct >50 cents per mile if you drive for business, even if your actual costs are less. Many people with older cars can keep driving costs down to about 30 cents a mile (including insurance, repairs, etc.). Deducting a cost you do not even experience is a huge giveaway.

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  • Larry Filler

    JimT is correct. You can get a subsidy or a pretax benefit for parking a bicycle at a train station to take the train to work as part of the qualified parking benefit. You can also get your transit pass as a benefit at the same time. So if you’re one of the lucky few who rents a bike locker at a commuter rail station, that cost is an eligible parking expense as is the monthly cost for the train pass. However, you can’t get the storage expense subsidized by your employer under the bicycle commuting reimbursement benefit if you are taking a transit benefit at the same time, for example! That needs to change.

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