Sunday, July 13, 2008

Pay commuting, medical, and/or dependent care costs pre-tax, and save money for both you and your employer!

Do you take public transit and/or pay for parking for your commute to work? Do you have expenses for child care or care of a dependent parent? Do you have out-of-pocket medical expenses? How does saving 25% or more on those costs sound, adding up to perhaps thousands of dollars a year? Well, if you can convince your employer to take the costs out of your paycheck pre-tax, then that's exactly what you'll get... and your employer will benefit too!

Under federal tax law (and mirrored by some state and local tax laws), employers can allow their employees to pay for commuting costs through pre-tax payroll deductions. The 2008 limits are $115 a month for public transit (including vanpools) and $220 a month for parking (either near work or at a location where you board public transit to work), but no higher than your actual costs.

So if you spend $100 a month to take public transit to work, and another $5o to park at the train or bus station, you could have $150 a month ($1800 a year) deducted from your paycheck. Over the course of a year, that'd save you $450 in federal income taxes (if you're in the 25% tax bracket), $137 in FICA taxes (7.65%, if you're below the $102,000 cap), and possibly an additional amount from state and local taxes (for example, in Massachusetts at the 5.3% state income tax rate you'd save another $95.) And if you spend more in a year, you could be looking at over $1000 in savings!

Sound good, but you're wondering how to broach the issue to your employer? Well, they benefit from the setup too. Since the amount is deducted from your taxable income, they don't have to pay their 7.65% share of your FICA taxes either (saving them $137 a year based on $1800 in expenses, or up to $300 if you use the maximum benefit.) They'll also save on federal unemployment tax, and they also may save on state unemployment and workers compensation payments, depending on state law. And if your coworkers take advantage of the option too, then your employer will benefit many times over. (There'll be some administrative costs to them to implement the program, but although I don't know the details of that sort of thing, I've seen it mentioned many times that the tax benefits usually outweigh the costs for the employer. And for-profit companies can deduct the administrative costs as a business expense.)

The same principle applies for other pre-tax benefits deducted from your paycheck-- like Flexible Savings Accounts for out-of-pocket medical/dental expenses or for dependent care (child care or elder care) expenses-- so if you have significant expenses in those categories and your employer doesn't offer pre-tax deductions, you may want to pitch that to them as well. (The limit for each is $5000 of eligible expenses a year.)

Do you have transportation, medical, and/or dependent care expenses deducted from your paycheck? Have you ever tried to convince an employer to start offering such benefits, and if so, how did it go?

1 comment:

Anonymous said...

It was a good experience to read the articles and contents on this site.