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An employer in the United States may provide transportation benefits to their employees that are tax free up to a certain limit. Under the U.S. Internal Revenue Code section 132(a), the qualified transportation benefits are one of the eight types of statutory employee benefits (also known as fringe benefits) that are excluded from gross income in calculating federal income tax. The qualified transportation benefits are transit passes, vanpooling, bicycling, and parking associated with these things. Commuting expenses in general are not excluded from taxable compensation in US tax law (for example, the cost of fuel to drive to the regular work place cannot be deducted). The goal of making the specific benefits described above nontaxable is to encourage forms of commuting that reduce road congestion and pollution. Overview Tax-free commuter benefits, also known as qualified transportation fringes, are employer provided voluntary benefit programs that allow employees to reduce their monthly commuting expenses for transit, vanpooling, bicycling, and work-related parking costs. The benefit is a federal tax benefit authorized under the Internal Revenue Code Section 132(a), Qualified Transportation Fringes. Monies used for these eligible expenses are excludable from gross income subject to federal taxes. Many states also exclude these monies from state and local taxes. Established in 1993 as part of the federal tax code section 132(f), commuter benefits were meant to provide tax incentives to employees to encourage their use of mass transportation, with the goal of reducing traffic congestion and improving air quality. The law provides for monthly caps on the amount that can be excluded from gross income and is therefore not taxed. Eligible transit benefits include expenses the employer pays associated with employees using any public or privately operated transit service. One allowable form of transit benefit is providing employees with transit passes, including farecards, tokens, vouchers, or passes which entitle a person to the use of a transit service or to purchase a transit pass. The employer can also use cash reimbursement in certain circumstances where a voucher or similar instrument is not "readily available" as defined by statute. However, cash reimbursement must be supported by a "bona fide reimbursement system" which includes either receipts or a certification for the type of expense. Vanpooling is an eligible benefit as long as the vanpool meets certain requirements, including that 80% of the mileage must be for the transport of employees to and from the place of work, and that the seating capacity must be for six employees plus the driver and at least half of the seats are used. Vanpools can be operated either directly or indirectly by the employer or arranged by the employee for the purpose of commuting. Commuter parking is defined as parking at or near the workplace or at a location from which an employee commutes to work by transit, vanpool or carpool. In addition, parking which is for residential purposes is excluded. The parking benefit is the only carpool related benefit in the statute. Under current U.S. tax law, commuter benefits are tax-free to employees only through an employer. An employee cannot directly take advantage of these tax benefits by, for example, taking a tax deduction or a credit on that person's individual tax return. Depending on the level of employer, options for commuter benefits may include: An employer-financed tax-free fringe benefit by which a company pays directly for the cost of an employee's use of public transportation or parking (up to the designated tax-free maximum), with the value of such benefit not reported as part of the employee's gross income. An employee financed commuter benefit in which an employee designates a portion of salary before taxes (pretax income) to pay for qualified transit, vanpooling, or parking expenses (up to the IRS allowable monthly maximum). A combination of the previous two options in which a portion of the benefit is funded through a tax-free fringe, with the remainder funded with pretax income of the employee, provided the aggregate does not exceed the monthly statutory limits. Qualified transportation fringe benefits allowed under section 132(f) include reimbursement for the cost of transportation in commuter highway vehicles (vanpooling), transit passes, and qualified commuter parking expenses. Benefits are commonly distributed in the form of prepaid transit tickets or metro passes (for use on subway, bus, light rail, ferry, or jitneys), prepaid transit or parking vouchers, debit cards or other electronic media (usable only for qualified commuter benefits), or cash reimbursements for transit or parking expenses. Commuter benefits are not governed under the same rules and regulations as Flexible spending account (FSA) arrangements and are treated differently for tax and reporting purposes. Significant tax savings are available through commuter benefits programs for both employers and employees. If offered as a pretax benefit, employees save on their federal payroll taxes because the amount designated by the employee is deducted from their gross income, and employers save because they are not required to pay payroll taxes on such deducted amount. And for employees who are subject to state and local taxes that recognize pretax benefits, their savings can be even greater. Employers who provide the benefit as a tax-free fringe benefit (paid by the employer) save on payroll taxes because the employer does not need to include the amount of the fringe benefit in the employee's gross income. Normally, the amount of any fringe benefit provided to employees must be included in the employee's gross income, but qualified transportation fringe benefits provided under section 132(f) are excluded from this requirement. History Prior to 1984, the IRS treated free employee parking, provided by an employer, as a tax-free fringe benefit regardless of the value of the parking. There was no tax-free benefit for transit commuting. This parking subsidy served as an incentive, in some cases a significant incentive, to drive to work even in areas where there was a good transit alternative. Many believed that such subsidies contributed to the growing congestion on the highways. In one study conducted in the New York City metro area, as many as 64% of the solo drivers commuting into Manhattan, an area well served by transit, were receiving a parking subsidy. The parking exemption was codified into law as part of the Deficit Reduction Act of 1984 when it was part of a new category of "working condition fringe benefits." Normally these kinds of fringe benefits referred to things that an employer provided, but would be tax-deductible if paid for by the employee. The cost of parking, however, could not be deducted by employees and so employer-paid parking did not fit this definition; nonetheless, .... Discover the J K Lasser Institute popular books. 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