Tax-Free Transit Benefit to Drop by Half Unless Congress Acts

November 28, 2011

Right now, workers can direct up to $230 per month of their paychecks toward tax-free transportation benefits, either parking or transit. Beginning January 1, 2012, the parking benefit will rise to $240 per month but the transit benefit will drop to $125 per month, unless Congress acts to change it.

This is a reversion to pre-2010 law, which provided significantly more generous tax-free benefits to parking rather than transit. The transit lobby is urging Congress either to extend the existing benefits for another year, or permanently make transit and parking equivalent:

“Our position is federal tax law shouldn’t have a bias in favor of one form of commuting over another,” Tynan said. “We seek to maintain parity and ensure there isn’t a disincentive to taking transit.”

In the background is an IRS order to transit agencies to separate out benefits for transit fares and parking at transit lots. The IRS has ruled that the transit benefit cannot be used for parking at transit lots and that employees must pick either parking or transit but not both. Logistical issues have stalled the implementation of that order but the IRS looks ready to enforce it beginning in 2012.

If there is to be a tax-free transit benefit, one option is to just aggregate it all and offer a combined transportation benefit that employees can divvy up as best suits them. For example, if the benefit was a total of $240, an employee could decide to use $100 for transit, $120 for parking, and $20 for bicycle commuting. This is not permissible under the current system, where employees must pick one exclusively. Such a change would obviate the need for expensive and confusing upgrades to keep transit commuters from using their benefits for parking. The benefit level could be set at whatever would make it revenue-neutral.

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