Collecting Retroactive Transit Tax Break Befuddles Commuters Burdens Employers

Ashlea Ebeling for Forbes writes: It turns out the retroactive commuter transit parity tax break Congress passed in January as part of the American Taxpayer Relief Act for 2012 is bittersweet. Depending on how you submitted your transit expenses to your employer, you might not get the tax savings. And for most of those who will benefit, they’re stuck waiting to file their tax returns as employers churn out corrected W-2s to make needed adjustments to gross income (my husband’s employer said to expect a W-2c by March 15). It gets even more complicated—in some cases employees may also be eligible for a refund on FICA taxes.

“One of these days Congress will wake up to the fact that there’s a need for lead time when it comes to tax legislation,” says Saul Brenner, a tax partner and CPA at Berdon LLP in New York.

The bottom line is this: if you ran all your transit expenses through your employer’s transit plan, bifurcating the total between $125 a month pretax salary deferrals (the old limit before the law change) and the rest as after-tax salary deferrals, then you get the tax savings on the difference between $125 a month and the new higher limit of $240 a month (that’s on par with the parking benefit). But if your employer capped the amount you could put away at $125 a month or you paid out of pocket for any additional commuting expenses above the $125 a month, then you’re out of luck.

Brenner has been busy explaining the retroactive transit tax conundrum to employer clients and to his own employees, who fell in both camps. He even talked to the lawyer who drafted the Internal Revenue Service notice to inform employers (i.e. their accountants) how to handle this Congress-induced mess. Apparently employers are only obligated to help employees who submitted all their expenses through a plan.

Jim Terminiello, marketing manager at Berdon, is in this tax-favored group. He takes New Jerseytransit at $160 a month and ran the full expense through his employer plan, so his wages were adjusted for the extra $35 a month, reducing his adjusted gross income for 2012 by $420. “For the people who aren’t in Jim’s boat, it’s unfair,” Brenner says. “I told them, ‘Write your Congressman.’”

That’s what Michael Devaney, a disgruntled commuter who rides the Long Island Railroad into New York City and then takes the subway downtown where he’s a settlements analyst for ConEd, did. (He hasn’t heard back from Sen. Charles Schumer who championed the original transit parity law). “The idea is for people to have more in their pocket, but it’s not happening,” says Devaney. “If you live in an area like New York City, the transit costs are so high, you’re losing out on something really significant.”

For commuters like Devaney who can’t get the retroactive break and whose expenses top $240 a month, they lost out on about $550 in tax savings (an extra $1,380 in pretax salary deferrals at a combined rate of 40%). That’s two months of commuting expenses, Devaney notes.

An estimated 2.7 million families gain from the transit break. It’s not clear just how many won’t get it for 2012 because of the way the fix is being administered. “All the stars have to be aligned,” sighs Ruth Wimer, an employee benefits lawyer with McDermott Will & Emery in Washington, D.C.

As to the second part of the fix, getting a refund for extra FICA (Social Securityand Medicare taxes) paid in, the Internal Revenue Service says employers have an obligation to repay employees their share of these taxes. Employers then file amended 941 quarterly returns (employers get a refund too).

“It’s a big pain in the neck,” says Wimer. All employees getting the first fix to adjusted gross income should also get the 1.45% Medicare tax back ($20 per employee), but only employees below the Social Security wage base of $110,100 will get the 4.2% Social Security tax back.

The transit parity break goes through year-end 2013, with the limit raised to cover up to $245 a month of expenses.