How Transportation Spending Accounts Lower Taxes

With the rising fuel prices, commuters in the United States are increasingly opting to travel by public transportation. This has been confirmed through a survey conducted among the large and small U.S. public transit agencies by the American Public Transportation Association which showed 88 percent of the surveyed agencies had their ridership increased considerably, and in some instances by double-digit values. Apart from the direct savings gained by using public transportation, the US workers using public transportation have the added benefit of lowering their taxes by using a transportation spending account. Thus, this article hopes to elaborate on how transportation spending accounts lower taxes for those who commute to work as well as for their employers.

A Transportation spending account (TSA) is an employer-sponsored plan endorsed by the Section 132 of the Internal Revenue Code. It allows an employee to contribute on a pre-tax basis for the work related commuting and parking for a particular period of time. However, in order to contribute, the employers need to offer the TSA to its employees whom should accept the offer willingly and contribute based on a pre-agreed plan, which may differ from one individual to another.

Following acceptance, an employee should contribute a predetermined amount suggested by him or herself from the monthly or weekly paychecks. However, the contribution cannot exceed the present maximum election for parking, which is $240 per month, and the maximum election for transportation, which is $125 per month. During the calendar year, an employee can claim work related reimbursement for parking and transportation expenses at any time by filling up and submitting an application form along with the receipts or notes pertaining to such claims.

For employees, contributing to the TSA from their salary before calculating federal, state or local taxes, could reduce the taxable income considerably. The savings in terms of taxes could add to the savings made through avoiding other expenses related to the use of a private vehicle for work related traveling. For the employers, having a lesser employee payroll would mean a reduction in the Federal Insurance Contributions Act related taxes which can amount to 12.4 percent of the earned income which should be paid to social security and another additional 2.9 percent which should paid to Medicare.

The following example should illustrate the savings made by the employee as well as by the employer when TSAs are implemented. If an employee chooses to contribute $100 from every bi-weekly paycheck to the TSA, they shall save around $25 from federal income tax, $5 from state income tax and almost $6 from FICA tax for every paycheck. Thus, the annual saving for the employee should be around $927. Similarly, the saving for the employer should be around $199 per employee per annum as the saving for the employer is only through the reduction in FICA tax.

Therefore, contributing to the transportation spending account is a valuable mode of saving both in-terms of taxes as well as on the direct spending for work related transportation and parking.