Commuter's Tax Break
Pay Commuting Costs with Pre-Tax Dollars.
The Transportation Equity Act for the 21st Century allows
employers to offer employees the opportunity to set aside a portion of their
salary to pay for certain transportation expenses. The employee will not be
taxed on amounts set aside and used for qualified expenses (that is, pre-tax
dollars are used to pay the commuting expenses).
Qualified transportation expenses generally include payments for
the use of mass transportation (for example, train, subway, bus fares), and for
parking. The maximum monthly pre-tax contribution for mass transit is $65, and
$175 for parking. These limits will be indexed for inflation.
How It Works
The transportation fringe benefit is similar to the pre-tax
flexible spending accounts available for medical expenses and dependent care.
One important difference, however, is the transportation benefit does not
include a "use it or lose it penalty," as is the case with
medical/dependent care flexible spending accounts.
Before the start of the plan year, individuals employee elected
to set aside a certain amount of pre-tax salary to cover qualified costs
incurred in commuting to work. The employee will designate an amount (up to $65
per month) for mass transit expenses and a separate amount (up to $175 per
month) for parking expenses. Separate reimbursement accounts are maintained for
each category, and funds cannot be commingled or transferred between accounts.
For example, amounts cannot be transferred from the mass transit to the parking
account.
As the employee incurs the expenses during the year, a request
(usually a form) may be submitted to the employer for reimbursement. Any amounts
remaining in the employee's reimbursement account at the end of the year are
refunded to the employee in the following year (the year after the employee's
contributions was withheld from his/her paycheck).
Who is eligible?
As a general rule, employers can only provide the new
transportation fringe benefit to employees. Common law employees and officers of
corporations are eligible (the law does not include non-discrimination
requirements for the benefit). Sole proprietors, partners, independent
contractors, and two-percent shareholders of S corporations are not eligible for
this transportation fringe benefit.
If you would like to lower your commuting expense, call us and
we'll be happy to help you do it.
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