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Answers are provided by Robert S. Kaufman
Treatment of Railroad Retirement Payments For Federal Income Taxes
(Posted February 3, 2003)
Question 215: Why is the amount taxed as "Social Security" less than my
Tier 1? From my RRB-1099R form, it looks like part of my Tier 1 is being taxed as Tier 2. Can you explain the difference?
Answer: The Income Revenue Code does not follow exactly the
Tier 1/Tier 2 division in Railroad Retirement benefits. Congress intended this when Social Security and Railroad Retirement first became subject to federal income taxation in the mid-1980's.
The differences recognize the different eligibility ages of the two benefit programs; Railroad Retirement generally provides benefits at an earlier age. Railroad Retirement also provides a Tier 1 (Social Security level benefit) in certain instances when Social Security would not yet pay benefits. Examples are full Tier 1 at age 60 with 30 years of service, and Occupational Disability when the worker is disabled from any kind of work.
The RRB is required to compute a unique "Social Security Equivalent Benefit" that is strictly used for federal income tax purposes. To do this, the RRB applies the exact Social Security formula to all of your earnings. This amount is usually less than your Tier 1. This is the amount that is taxed as a Social Security benefit. The remainer of Tier 1 and all of Tier 2 is reported and taxed as a contributory private pension.
In your case, you also receive a "Vested Dual Benefit" in addition to Tier 1 and Tier 2. That benefit is taxed as a noncontributory private pension.
As you can well imagine, taxation of Railroad Retirement benefits can be a complex and confusing subject.
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice
to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the
law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness
or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.)
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