The Emergency Economic Recovery Act signed into law by President Obama this week provides significant tax savings, up to $1,000 or more a year, to working Americans who commute by transit. The law raises the amount of pretax income that workers enrolled in employer-sponsored commuter benefits programs can use to pay for mass transit -- from $120 per month to $230 per month.
"This law nearly doubles the savings workers can enjoy by using mass transit and sets us on a path to a future that’s both economically and environmentally sustainable," said Larry Filler, president and CEO of TransitCenter, a nonprofit that promotes mass transit use in order to reduce traffic congestion and improve air quality.
"The support of public transit by the Congress and the President, evidenced in the new Economic Recovery Act, again demonstrates that win-win solutions can be found to answer both our economic and environmental needs," said BART's General Manager Dorothy W. Dugger. "Mass transit has become an important part of life for commuters seeking to trim their budgets, and make the smart choice for our environment."
The cap increase is projected to boost both employee and employer savings. Employees can now save up to $1,000 a year or more on their transit commute, representing a potential $440 a year increase in what they can save if their commuting expenses exceed the current monthly cap of $120 per month. Employers will benefit as well. Companies offering the benefit can save up to an additional $100 per employee per year in payroll taxes.
Besides providing relief to commuters who already use the benefit, the legislation will increase the number of employees offered the benefit as a result of the increase in employee and employer savings under the new law. Recent TransitCenter surveys indicate that as many as one-third of employers not currently offering the benefit would do so if the monthly transit benefit were increased significantly, as it now has been. Further, 53 percent of employees would take advantage of the benefit if offered to them. This represents a significant increase in participation across the country bringing much needed financial relief to a greater number of commuters.
The new provision is expected to be particularly helpful to commuters looking to offset fare hikes put into effect by mass transit operators struggling to address budget shortfalls.
"We know that transit operators across the country are being forced to raise fares, and in some cases significantly, to offset operating deficits resulting from the downturn in the economy," said TransitCenter’s Filler. "The new higher transit benefit will not only protect commuters from the full impact of any fare increase, but for most, keep the cost of their monthly commute below what they are currently paying."
How the commuter benefit works
The commuter benefit allows employees to deduct up to $230 per month from their gross income to pay for their mass transit commutes. Employees whose monthly mass transit fees are less than the $230 cap are allowed to deduct the full amount from their paychecks. The measure helps employers save money by lowering their payroll taxes. Additionally, employees are allowed to deduct up to $230 per month for eligible commuter parking expenses.
Tax-free commuter benefits can be structured as an employee-funded tax-free payroll deduction; as an employer-funded benefit; or the costs can be shared by employer and employee. The benefit can be delivered in the form of transit provider-specific passes, universally accepted vouchers and terminal-restricted debit cards, or through a reimbursement model under specific conditions defined by the IRS.
Previously, employers were allowed under Section 132(f) of the Internal Revenue Service (IRS) Code to let their employees use up to $120 per month of their pre-tax income to pay for their transit or vanpool commuting expenses and up to $230 per month for commuter parking. The new legislation amends the IRS Code to set the monthly tax-free contribution limit for transit/vanpool to a maximum of $230 per month.
More information on tax benefits to consumers, including an outline of pros and cons for the various options, can be found in BART's Rider Guide.