Tax Benefits for Using Public Transportation

My employer said that pretax benefits for public transportation just increased with passage of the fiscal cliff legislation, and that I could increase the amount of money I’m setting aside for commuting benefits. What are the new limits, and what do I need to do?

The law did increase the maximum amount you can set aside before taxes to use for mass transit, such as the subway, bus or train. In 2012, you could set aside $240 per month from your pay before taxes for parking but only $125 for public transportation. The new law boosted the mass transit benefit to be in line with the parking benefit, and both were also adjusted for inflation Now you can set aside $245 per month for public transportation, plus $245 per month for parking, for a total of $490 per month before taxes if you pay for both parking and public transportation to get to work. You generally set your contribution level for the year, but most employers let you make a change in any month -- for example, to suspend your contribution during a month when you’re on a business trip or vacation, or to adjust the allocation if you start driving less and taking mass transit more (or vice versa).

Because the limits were lower last fall, when you designated how much of your pay to set aside for transit benefits during open enrollment, you will probably need to fill out a new form to boost your contribution. (Some employers are asking all employees who use the transit benefits to fill out a new form, even if they aren’t increasing their contribution.) Contact your human resources department quickly so you can make changes in time for your next paycheck.

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Besides increasing the contribution levels for mass transit for 2013, the new law also increased them retroactively for 2012. Employers are waiting for guidance from the IRS on how to handle the retroactive change, says Jody Dietel, chief compliance officer with WageWorks, which administers consumer-directed benefits.

For more information about pretax commuting benefits and a calculator to help estimate your potential tax savings, see WageWorks’ SaveSmartSpendHealthy.com.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.