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The Tax Increase Prevention Act Has Taken Effect

It is time to collect! President Barack Obama has signed HR 5771, aka the Tax Increase Prevention Act, into law. The highly anticipated legislation renews more than 50 expired tax breaks, allowing businesses, commuters and more to collect with tax season around the corner. For many in the corporate world, the excitement centers on the Qualified Transportation Fringe Benefit.

Until the resolution of HR 5771, businesses and their employees have experienced a lack of parity between the tax-exempt exclusion for transit benefits ($130 a month) and the tax-exempt exclusion for parking benefits ($250 a month).

Now, that has changed.

The extension of HR 5771 will increase retroactively for one year the monthly, maximum-exclusion amount for qualified public transportation and van-pool fringe benefits from $130 to $250 a month. With that raise, the 2014 tax-exempt exclusion transit benefits (that is, transit passes or traveling in a commuter highway vehicle) now will match the tax-exempt exclusion for qualified parking expenses.

However, HR 5771 is only a temporary measure. On Jan. 1, 2015, the transit limit will drop back to its previous monthly amount of $130 unless Congress takes more action.
Section 132(f) Qualified Transportation Fringe Benefit

According to Internal Revenue Code Section 132 and the Transportation Equity Act for the 21st Century, companies may allow their employees to deduct funds from their paycheck, up to the monthly maximum, toward expenses for the work commute and parking. The amount provided from the employee is pre-tax and not included in gross income. Since the cost never reaches gross income, employees are taxed less, resulting in more money when filing federal income tax.

On the flip side, by subsidizing employee commuter costs instead of reimbursing them through wages, organizations are given a lower tax rate on payroll.

Although the extensions expire in little more than a week, it provides organizations and individuals one more thing to celebrate entering the New Year. Some say, “More money, more problems”; we will let you decide.