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Transit Benefits Parity Made Retroactive and Permanent

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The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended and enhanced many popular tax breaks for individuals and businesses. Included in the large number of extended incentives is transit benefits parity. Moreover, Congress made transit benefits parity permanent. Many individuals may benefit from this tax break, depending on their employers.

Background

Many employers encourage employees to use mass transit or van pools to commute to and from work. Federal tax law also encourages commuting by mass transit or van pooling by treating these incentives as qualified transportation fringe benefits.

In 2009, Congress first enacted transit benefits parity as a temporary measure. Previously, the amounts that could be excluded from income as qualified transportation fringe benefits were subject to one monthly limit for combined transit pass and vanpool benefits and a higher monthly limit for qualified parking benefits. Parity increases the monthly exclusion for combined employer-provided transit passes and vanpool benefits to the same level as the monthly exclusion for employer-provided parking.

As mentioned, parity was temporary. Between 2009 and 2015, Congress regularly extended transit benefits parity as part of an annual (or every two year) extension of the so-called tax extenders. Before the PATH Act, the most recent extension of transit benefits parity had expired after December 31, 2014.

Permanent and Retroactive

In 2015, Congress made parity permanent. The PATH Act permanently extends parity with no expiration date, as under previous laws. The PATH Act also makes transit benefits parity retroactive to January 1, 2015.

For 2015, the monthly limit on the exclusion for combined transit pass and vanpool benefits is $250, the same as the monthly limit on the exclusion for qualified parking benefits. Therefore, the maximum monthly excludable amount for the period January 1, 2015, through December 31, 2015, is $250 for transit passes and van pool benefits and also $250 for qualified parking. For 2016, the monthly exclusion for each benefit is $255.

IRS Guidance

In Notice 2016-4, issued after passage of the PATH Act, the IRS clarified how employers should address the retroactive increase for periods after 2014 in the monthly exclusion for transit passes and van pooling benefits. The IRS also provided a special administrative procedure for employers to make adjustments on their Forms 941, Employer’s Quarterly Federal Tax Return, filed for the fourth quarter of 2015, and in filing Forms W-2, Wage and Tax Statement.

States

Before completing your income tax return, however, be sure to check your resident state to determine if they follow the federal increase in benefits. Massachusetts, for one, does not follow the federal limits on this. Employees will therefore see a difference between their federal taxable wages and Massachusetts taxable wages.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

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