Are employers allowed to tax your car allowance?

Your employer moved you to a non-accountable plan which is taxable. However, you can now claim transportation expenses as a non-reimbursed business expense if you qualify. You can either claim actual expenses or a flat rate per mile. The 2010 rate is $.50. In order to claim the deduction you must be able to itemize using Schedule A. Further, only that portion of unreimbursed business expenses (along with certain other expenses) in excess of 2% of your adjusted gross income can be deducted. You will need to keep records of all business miles driven.

Your employer does not tax your income. The federal and state governments tax your income. The employer only withholds so you'll have a large percentage of your earnings in an account so you'll hopefully have enough not to owe too much at the end of the year.

As others have stated, you went from an "accountable plan (not reported on your W2) to a "nonaccountable plan," which treats the mileage reimbursements as taxable wages.

The biggest issue is not taxation, the biggest issue is your employer cut your pay. You can deduct the mileage on your tax return subject to limits, but the extra tax you end up paying will be minimal compared to the pay reduction.

Taxation aside, you went from getting reimbursed $750 a month for miles driven to $250 a month for miles driven (approx). You're making $3,000 less per year.

The "unannounced" aspect of this is troubling. Look for other signs the company you work for is in bad financial shape, and be ready to jump ship if it's going down.

If you get a car allowance plan, it sounds like it is a nonaccountable plan which means it is taxable. What you can do is write off the difference between your mileage expense and the amount you are reimbursed for on your taxes. A little more paperwork but at least you get some form of reimbursement!

If you just get a flat allowance and aren't required to report your business mileage and get reimbursed based on that, it's not "reimbursement" and they're not only allowed but are required to treat it as taxable income.

If you itemize, and if you have a log of ALL of your miles for the year broken down by personal, commuting and business miles, you might be able to take a dedection for some of your expenses

First, the employer does not tax it. The government, not the employer, taxes it. The employer merely reports it to the government and withholds tax for the government.

Second, they must treat it as taxable income. They have no option. For it to be qualified to be tax-free it has to be based on mileage or actual expenses. If it a flat rate per month (or other unit of time) and does not depend on mileage or actual expenses, then it must be taxed. This is required by the government, and is not a decision of the employer.

A flat rate car allowance is always going to get taxed as income.

$9000 of mileage (18,000 * .50 per mile) would be deductible on your schedule A, but is reduced by 2% of your AGI.

It will be a taxable benefit to you unless you are using the car for business purposes. If it is just to give you a benefit, you'll pay taxes on the money same as cash income. The company gets to write it off in either case, whether as salary or re-imbursement of your expenses. The GST input tax credits are only available if the reimbursement is for business purposes.

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if they are taxing your car allowance, yes you can claim all the mileage that you have managed to record in a log and are able to itemize

It sounds like they now have a non-accountable plan.

Track your mileage and expenses yourself......and be meticulous about it. You may be able to get a tax deduction when you file your tax return.