Railroad Retirement Benefits and Taxation Does it work any differently when I finally retire?
By Jenn King
We are coming to the end of tax season and you have your taxes already filed, right? GREAT NEWS – or hopefully soon it will be great news! You are about to retire from the Railroad industry and the thought pops up – do I know how my railroad retirement benefits will be taxed? Other than my income amount, will my next years’ tax return look different that last years? So much of what I’ve read online is SO confusing! Let’s try to simplify and first examine how your benefits are taxed.
The taxation of your benefits are different based on the type of benefit.
Tier I Taxation – You’ll recall from previous blogs that Tier I benefits are based on the combined credits you have earned throughout your career both in Railroad Retirement and the Social Security Systems. This amount of Tier I that would have been payable if railroad employment had actually been covered by the Social Security Act, is your Social Security Equivalent Benefit or SSEB. This amount is treated the same as Social Security for Federal income tax purposes.
To find out if any of your SSEB is taxed, you have to compare the base amount for your filing status against your Provisional Income which is the SUM of:
Your household Adjusted Gross Income PLUS
Your tax-exempt interest income PLUS
½ of your SSEB
Here are the base amounts based on filing status:
$25,000 Single, Head of Household, Qualifying Widow(er)
$25,000 Married filing Separately and lived apart from your spouse for the entire year
$32,000 Married Filing Jointly
$0 Married Filing Separately and lived with your spouse at any time of the year
If that Provisional Income EXCEEDS your base number then some of your benefits may be taxable. Those benefits, like Social Security, can be taxed up to 85% based on how you file your taxes and your total combined income.
What about the Non-Social Security Equivalent Benefit (NSSEB) portion of Tier 1, Tier 2, Vested Dual benefits and Supplemental Annuity payments?
These combined are considered TAXABLE INCOME and will be completely subject to Federal income taxes.
These may seem like a calculations that you do not want to have to figure out at the end of the tax year. The good news is….YOU DON’T HAVE TO FIGURE THIS OUT on your own!!
No later than January 31st following the tax year, you will get TWO statements that show the total annuity payments made to you and the amount of taxes withheld so that you can file your taxes.
You will get Form RRB-1099 that shows your portion of the Tier 1 Railroad Benefit that you would have been entitled to receive under the Social Security system that is taxed based on the base number comparison.
You will also get a Form RRB-1099-R that will show the other NSSEB portion of Tier 1, your Tier II, vested dual benefit and any supplemental annuity payments made to you, combined in a single amount.
Can I set up withholding from my Railroad Retirement Benefits so that I don’t have a big tax bill at the end of the year?
Yes, you CAN, but it will require TWO forms:
W-4V – Voluntary Withholding Request – this form is to withhold taxes from your SSEB payments. You will submit this form to the Railroad Board and select the one of the following withholding rates: 7%, 10%, 15% or 25%.
Form RRB W-4P – Withholding Certificate for Railroad Retirement Payments. Just like your pay when you were working, you have to list the number of withholding allowances you can claim rather than give a percentage of payment withheld. This is NOT a required form. However, if you do not file this form and your combined NSSEB, Tier II, vested dual benefit and supplemental annuity exceeds $2047, they will automatically withhold taxes as if you were married claiming 3 allowances.
Dual retired railroaders? It is recommended that all of your allowances are claimed on the form for the person who has the largest payment and then claim zero on the other persons RRB W-4P. This will ensure your withholding is more accurate.
I live in a state with State income tax. Will I have to pay state taxes on my Railroad Retirement benefits?
YES AND NO.
Like Social Security, your SSEB is excluded from State income tax.
The NSSEB portion of Tier 1, Tier 2, Vested Dual benefits and Supplemental Annuity payments is treated like a private pension, so it will be fully taxable.
While we are not tax advisors, we do help our clients gain an awareness of how their tax situation impacts their retirement plan. For your specific circumstance, we always encourage others to seek out advice from tax professionals. Especially as the Railroad Retirement system is so nuanced, we would highly recommend you find a tax professional who has experience working with other Railroad retirees!
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