The Internal Revenue Service released guidance today, Notice 2015-2, on the retroactive commuter transit parity tax break Congress passed in December as part of the Tax Increase Prevention Act. The break for transit riders was increased to $250 a month retroactive to Jan. 1, 2014 and good through Dec. 31, 2014, up from $130 a month, to match the separate $250 a month break for parking.
The extension of the transit break was good news, but the implementation of it is a repeat headache for train, subway and bus commuters who use pre-tax transit benefits to subsidize their commute–and their employers. When can you expect to see the excess benefits? On your 2014 W-2 or corrected W-2.
The parity provision, a temporary law, first set the same maximum monthly limits for transit and parking benefits in 2009. Last time when it was renewed for 2012 and 2013 as part of the fiscal cliff deal, signed into law on Jan. 3, 2013, the IRS released Notice 2013-8 on January 16, 2013—for how to deal with 2012; give the IRS credit for being quicker this time.)
How much of a difference does the equalized limit make? If you’re in the 40% combined federal and state tax bracket and can select $250 a month in pre-tax transit benefits, instead of just $130 a month, you 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 is even greater.
Basically your employer has to make you whole if you ran all your 2014 transit expenses through your employer’s transit plan, bifurcating the total between pre-tax salary deferrals up to the $130 limit and the rest as after-tax salary deferrals. Look for the fix on your 2014 W-2. If not, your employer should issue a corrected W-2.
That’s what happened to my family; we submitted a corrected W-2 when we filed our 1040 tax return for 2012, after the 2012 retroactive extension. Then last year we got a by mail audit (a CP 2000 notice) saying our taxable wages were understated and we owed $504 in taxes; the IRS agreed we owed zip when I sent in another copy of the corrected W-2 showing the correct taxable wages based on the retroactive transit parity break.
Employers have to adjust their fourth quarter Form 941 tax returns or file corrected Form 941-Xs as well as adjusting workers’ W2 forms. “It’s a major pain in the you know what,” says Saul Brenner, a tax partner and CPA with Berdon LLP in New York City, noting that the IRS isn’t to blame, rather it’s Congress. “Our elected officials can’t get their act together until they want to go on Christmas holiday, and then all of a sudden things get done. It’s a terrible way to run a ship because no one can plan.”
The bad news is that we’re in the same boat for 2015. Employee benefits administrator WageWorks WAGE +0.48% has this big warning on its website: “Note that this retroactive increase applies ONLY to the time period of 1/1/14 through 12/31/14. For the calendar year of 2015, the monthly transit pre-tax benefit cap will revert back to $130 without further legislation.”
Meanwhile the limit for parking stays at $250 a month for 2015. Congress isn’t expected to take up the tax extenders for 2015, including the transit parity provision, any time soon. So the only way to protect your potential benefit is to continue running your commuting expenses through payroll.
Should there be a parking benefit at all? The Transit Center and the Frontier Group put out a report last fall questioning the parking benefit and arguing that the transit benefit reaches too few people: “Subsidizing Congestion: The Multibillion-Dollar Tax Subsidy That’s Making Your Commute Worse.” Together, the parking and transit tax benefits account for an estimated $8.6 billion ($7.3 billion attributable to the parking benefit) in foregone federal and state income tax and payroll tax revenue each year, the report says. That should make it into debates on tax reform.