Our friends in Congress have granted some nice tax breaks for transportation-related employee fringe benefits. Several of these breaks are intended to encourage us to give up our evil, gas-guzzling, pollution-spewing vehicles when commuting to work. If your employer offers these tax-favored benefits, you should probably take advantage of them by signing up. What you need to know:
Favorable Tax Treatment
The employer-provided benefits I’m about to explain are treated as tax-free fringes, within limits. That means their value won’t be included in your taxable salary. Therefore, you won’t owe any federal income tax, state income tax (if applicable), Social Security tax or Medicare tax on the value.
If your company is unwilling to pay for these fringes, it may allow you to instead set aside part of your salary to pay for them yourself. 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 set aside for transportation fringes is subtracted from your taxable income. Therefore, you won’t owe any federal or state income taxes or any Social Security or Medicare taxes on the amount you set aside. In effect, the salary-reduction arrangement allows you to pay commuting costs with pre-tax dollars rather than with what’s left after taxes. While a salary-reduction deal isn’t nearly as good as having your employer pay, it still helps you out by cutting your taxes.
Now for the specifics on tax-favored transportation fringes.
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 a monthly limit of $245. The fiscal cliff legislation increased the tax-free limit from $125 to the current $245. It’s scheduled to fall back to around $125 in 2014, but I expect Congress will decide to extend the current higher limit through at least next year. Fingers crossed!
Employer-provided van pooling is also tax-free, up to a monthly limit of $245 for the rest of this year. This benefit was more common a few years ago, but the concept never really caught on, because it’s inconvenient for the riders, and employers have to comply with some burdensome tax rules. If your company still offers van pooling, and it works for you, I say go for it.
If your company doesn’t pay for these fringes, it might offer a tax-saving salary-reduction arrangement instead. For example, say you set aside the maximum $245 per month to pay for train passes with your own money. If you are in the 25% federal income tax bracket, you could save up to $960 a year in federal income, Social Security and Medicare taxes. You might reap state income tax savings too.
Employer-provided parking allowances are also tax-free, up to a monthly limit of $245 for the rest of this year. You can be given this fringe on top of the tax-free $245 a month for transit passes. For example, you could get $245 per month to pay for the train plus another $245 to pay to park at the station. Or you could simply drive to work and get $245 in tax-free bucks to help cover parking near the office.
Once again, if your company doesn’t pay for these fringes, it might offer a salary-reduction arrangement instead. Say you set aside $245 per month for train passes and another $245 for the park-and-ride lot. If you’re in the 25% federal income tax bracket, you could save as much as $1,920 a year in federal taxes. Not bad for turning in a form to the company.
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. Not much, but better than nothing if you’re a cyclist.
However, you’re not allowed to receive the bicycle-commuting fringe for any month that you receive any tax-free employer-provided transit passes, van-pooling services or parking allowances. Finally, you can’t use a salary-reduction arrangement to pay for bicycle-commuting costs with pre-tax dollars.
The Bottom Line
If your company pays for transportation fringes, that’s great. Take advantage. If not, I hope you can at least sign up for a salary-reduction deal that cuts your taxes. One more thing: The favorable tax treatment of these transportation fringes is available to all employees, regardless of how much you make. The higher your tax bracket, the more you can save by signing up.
Source : marketwatch.com.