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Taxing questions: Transit benefit changes take effect in 2011

By Robert Thomson
Saturday, December 4, 2010; 5:07 PM

Transit riders, get out your calculators. Many commuters who take advantage of tax breaks or direct subsidies for usingMetro and other transit systems in the D.C. region need to look not only at how much they pay, but also at what share goes to riding or to parking.

Two federal tax rules are scheduled to take effect in January. These rules involve the travel budgets for tens of thousands of commuters. The impact depends on how much of a benefit the rider gets now and how the rider uses the benefit.

We'll focus today on the basics of what's changing and what you need to do, but if you have additional questions - and many will - write to me at thomsonr@washpost.com. I'll address other issues in upcoming columns and on the Dr. Gridlock blog, at washingtonpost.com/drgridlock.

Transit benefit drops

What's a transit benefit?

Under IRS rules, commuters get tax breaks on transportation benefits provided by their employers. One allowable benefit is for commuter parking. Another is for transit use. Those two breaks go back several decades, although the limits have been increased and provisions modified.

What's changing?

The maximum amount of an employer-provided transit benefit that can be excluded from taxable income is scheduled to shrink from $230 per month to $120 on Jan. 1. The maximum for commuter parking will remain at $230 per month.

Why is it changing?

Under the 2009 federal stimulus law, the limit on the transit benefit temporarily rose from $120 to $230, to match the higher limit on the parking benefit. That provision is scheduled to expire at the end of this year. Transit advocates are urging Congress to extend the $230 limit for riders.

Will the limit really drop?

Most likely. There's no sign Congress will extend the provision, at least not during the current lame-duck session. The IRS can raise the limit on the income exclusion to account for inflation, but no such decision has been announced.

What must I do?

Metro says the average monthly benefit claimed under SmartBenefits, the system that administers the transit benefits and distributes them to SmarTrip cards, is $115.87. Commuters who claim the average benefit and put it all into transit riding may not need to fill out a new benefits form, but they should check with their employers.

On the other hand, SmartBenefits has 90,000 customers who receive more than $120, and 15,579 claim the current maximum of $230. Those who get a direct transit subsidy from their employers, as many federal workers do, may see their fringe benefit reduced in January. An employee who has been receiving the maximum transit subsidy stands to lose as much as $1,320 in 2011.

Many other commuters in the SmartBenefits program don't get a direct subsidy, but their employers do allow them to set aside a certain amount of their salaries before taxes to pay for transit riding and transit parking. Again, many are under the $120 limit, but those above it need to find out how their employers will handle the cutback, which could affect their taxable income.

Some commuters - especially some of those who get direct subsidies of more than $120 a month - may decide to stop taking transit because of the extra cost to them. Metro thinks it could eventually lose $5 million to $10 million annually because of this. Carol Kissal, Metro's finance chief, notes that commuters tend to change their habits slowly, after considering their options, so the immediate effect on Metro probably won't be dramatic.

SmartBenefits changes

That first change is the most significant in terms of money, but this next one is the most complicated for riders.

What's changing?

The way that commuters download the value of their benefits to their SmarTrip cards will change over a few months, starting in January. Until now, the parking and riding benefits have been lumped together on the cards. As the new program takes effect, the benefits will be separated electronically. A commuter will spend the transit benefit only at the fare gates and fareboxes. The parking benefit will be spent only at the parking gates. If a commuter goes over the monthly amount set aside for one of those benefit categories, the rest of the payment will be drawn from whatever extra money the commuter added to the card.

Why is it changing?

The IRS wants to make sure that the tax benefits are going to their intended purpose, whether that's riding or parking, and that the limits are not exceeded.

Will this really happen?

Commuters remember that we got these instructions last fall, then Metro got a one-year extension from the IRS. No further extension has been requested, and many employers are implementing their side of the program.

What must I do?

Contact your employer's benefits office now. If you use your SmartBenefits for both parking and riding, you'll need to specify the amount you want in each category for the January allocation. Start by calculating your monthly expenses for each.

Key change from last year's version: The employer will have the option of rolling over your unspent money so you don't lose it. Make sure your employer does that.

Build in a cushion by adding money to your SmarTrip card's general fund. The money that you add - as opposed to the money that your employer adds in the monthly download - can be used for any purpose. The fare gate or farebox will start to draw from your general fund once you've exhausted the amount you assigned to transit benefits. The parking gate will draw from your general fund once you've exhausted your assigned parking benefit. Whatever you have in your general fund at the end of the month will be there for you at the start of the next month.

You don't need to buy a new SmarTrip card. One card can handle the transit and parking benefits, plus the extra money you add for your general fund.

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