Retroactive 2014 Commuter Tax Break and Guidance from the IRS

Each week, residents of the mile high city and surrounding communities get up and start the sometimes long commute to work.

With numerous buses circling downtown and various bustling light rail stops, it’s obvious that not everyone drives to work. Denver’s mass transit system is easy, inexpensive and convenient which is why many people rely on it throughout the year for transportation to work. While some may not prefer this method of getting to and from work, the good news is that there are tax benefits to be had.

Many know about the popular tax benefits that were renewed through December 31, 2014, by the Tax Increase Prevention Act. There were a number of common business and individual tax incentives that were extended. However, few are aware of the retroactive commuter transit parity tax. This tax break provides an increase from $130 to $250 per month in benefits to individual taxpayers that rely on mass transit to get to work. This new amount now matches the separate $250 per month tax break for parking expenses.

So you may be asking yourself, “just how much of a difference does the equalized limit make for my “bottom line”? Hanson & Co. has outlined the answers below:

  • If you’re in the 40% bracket (combined federal and state taxes) and you select $250 a month in pre-tax transit benefits, you’ll save $576 a year (an extra $1,440 in pretax salary deferrals times the 40% rate).
  • For high-earners who are subject to the new 39.6% top federal income tax rate, the benefit and tax savings are even greater.

To simplify, if all of your 2014 transit expenses were run through your employer’s transit plan, your employer has to make you whole. What this means your employer must divide the total between pre-tax salary deferrals up to the $130 limit and the rest as after-tax salary deferrals. The fix should appear on your 2014 W-2. If not, your employer should issue a corrected W-2.

Unfortunately the bad news is that Colorado commuters are back in the same boat for 2015. This retroactive increase applies ONLY to the tax return year 2014 as mentioned above. The 2015 tax will revert back to $130 per month without further legislation. The limit for parking in 2015 will remain at $250 per month.

Remember that these allowances were created by Congress, not the IRS, and Congress isn’t expected to take up the tax extenders for 2015 anytime soon. Therefore, the only way to protect your potential benefit is to continue running your commuting expenses through payroll.

Contact Us

While commuting to and from work each day on mass transit can be challenging, there is a positive benefit to it thanks to they retroactive commuter transit parity tax break. For more information on how you can benefit, or for help filing your 2014 federal income tax return, please contact please contact us at (303) 388-1010 or click here for email.

TaxNate Galuzzi