For Publication January 2007

Federal Income Tax and Railroad Retirement Benefits

The following questions and answers describe the tax statements issued by
the Railroad Retirement Board (RRB) each January for Federal income tax
purposes. Railroad retirement beneficiaries needing information about these
statements, or tax withholding from their benefits, should contact the nearest
office of the RRB. For further Federal income tax information, railroad
retirement beneficiaries should contact the nearest office of the Internal
Revenue Service (IRS).

1. How are the annuities paid under the Railroad Retirement Act treated
under the Federal income tax laws?

A railroad retirement annuity is a single payment comprised of one or more
of the following components, depending on the annuitant's age, the type of
annuity being paid, and eligibility requirements: a Social Security Equivalent
Benefit (SSEB) portion of tier I, a Non-Social Security Equivalent Benefit
(NSSEB) portion of tier I, a tier II benefit, a vested dual benefit, and a
supplemental annuity.

In most cases, part of a railroad retirement annuity is treated like a
social security benefit for Federal income tax purposes, while other parts of
the annuity are treated like private pensions for tax purposes. Consequently,
most annuitants are sent two tax statements from the RRB each January, even
though they receive only a single annuity payment each month.

2. Which railroad retirement benefits are treated as social security
benefits for Federal income tax purposes?

The SSEB portion of tier I (the part of a railroad retirement annuity
equivalent to a social security benefit based on comparable earnings) is
treated for Federal income tax purposes the same way as a social security
benefit. The amount of these benefits that may be subject to Federal income
tax, if any, depends on the beneficiary's income.

If taxable pensions, wages, interest, dividends, and other taxable income,
plus tax-exempt interest income, plus half of the amount of the social security
equivalent benefit payments exceed:
* $25,000 for an individual, $32,000 for a married couple filing jointly, and
zero for a married individual who files separately but lived with his or her
spouse any part of the year, up to 50 percent of these railroad retirement
benefit payments may be considered taxable income;
* $34,000 for an individual, $44,000 for a married couple filing jointly, and
zero for a married individual who files separately but lived with his or her
spouse any part of the year, up to 85 percent of these benefits may be
taxable.

3. Which railroad retirement benefits are treated like private pensions for
Federal income tax purposes?

The NSSEB portion of tier I, tier II benefits, vested dual benefits, and
supplemental annuities are all treated like private pensions for Federal income
tax purposes. In some cases, primarily those in which early retirement
benefits are payable to retired employees and spouses between ages 60 and 62,
and some occupational disability benefits, the entire annuity may be treated
like a private pension. This is because social security benefits based on age
and service are not payable before age 62 and social security disability
benefit entitlement requires total disability.

4. What information is shown on the railroad retirement tax statements sent
to annuitants in January?

One statement, the blue and white Form RRB-1099 for U.S. citizens or
residents (or black and white Form RRB-1042S for nonresident aliens), shows the
SSEB portion of tier I or special minimum guaranty payments made during the tax
year, the amount of any such benefits that an annuitant may have repaid to the
RRB during the tax year, and the net amount of these payments after subtracting
the repaid amount. The amount of any offset for workers' compensation and the
amount of Federal income tax withheld from these payments are also shown.
Illustrations and explanations of items found on Form RRB-1099 and Form RRB-
1042S can be found in IRS Publication 915, Social Security and Equivalent
Railroad Retirement Benefits.

The other statement, the green and white Form RRB-1099-R (for both U.S.
citizens and nonresident aliens), shows the NSSEB portion of tier I, tier II,
vested dual benefit, and supplemental annuity paid to the annuitant during the
tax year, as well as the employee contributions amount. The NSSEB portion of
tier I along with tier II are considered contributory pension amounts and are
shown as a single combined amount in the Contributory Amount Paid box item
(Item 4) on the statement. The vested dual benefit and supplemental annuity
are considered noncontributory pension amounts and are shown as separate box
items on the statement. Also shown is the amount of Federal income tax
withheld from these payments. In addition, the statement shows the amount of
any of these prior year benefits repaid by the annuitant to the RRB during the
tax year, but this amount is not subtracted from the gross amounts shown
because its treatment depends on the years to which the repayment applies and
its taxability in those years. To determine the year or years to which the
repayment applies, annuitants should contact the RRB. Illustrations and
explanations of items found on Form RRB-1099-R can be found in IRS Publication
575, Pension and Annuity Income.

If the annuitant is taxed as a nonresident alien of the United States, Form
RRB-1042S and/or
Form RRB-1099-R will show the rate of tax withholding (0%, 15% or 30%) and
country of permanent residence.

The total Part B Medicare premiums deducted from the railroad retirement
annuity may also be shown on either Form RRB-1099 (Form RRB-1042S for
nonresident aliens) or Form RRB-1099-R.

The statements also include the annuitant's name, current mailing address,
RRB claim number and payee code, United States taxpayer identifying number
(social security number or individual taxpayer identification number or
employer identification number), detailed explanations of all the items on the
statements, and the toll-free telephone numbers and Web site addresses of the
RRB, the IRS, and the Social Security Administration.

Copy B and/or Copy 2 of Form RRB-1099-R must be submitted with the
annuitant's tax return. Annuitants should retain copy C of all statements for
their records, especially if they may be required to verify their income in
connection with other Government programs.

5. What is the significance of the employee contributions amount?

For railroad retirement annuitants, the employee contributions amount is
considered the amount of railroad retirement payroll taxes paid by the employee
that exceeds the amount that would have been paid in social security taxes if
the employee's railroad service had been covered under the Social Security
Act. The employee contributions amount is referred to by the IRS as an
employee's investment, or cost, in the contract. Employee contributions are
not a payment or income received during the tax year. Only employee and
survivor annuitants have an employee contributions amount shown in Item 3 of
their Form RRB-1099-R.

The contributory amount paid (NSSEB portion of tier I and/or tier II) is
considered income and is reported to the IRS. The contributory amount paid is
either fully taxable or partially taxable depending on whether the employee
contribution amount has been used to compute a tax-free (nontaxable) portion of
the contributory amount paid. If no employee contribution amount is shown on
Form RRB-1099-R, then the contributory amount paid is fully taxable.

The use and recovery of the employee contributions amount is important for
annuitants since it affects the amount of taxable income to be reported on
income tax returns for a tax year. There is a tax savings advantage in using
(recovering) employee contributions since it may reduce the taxability of the
contributory amount paid and in turn the amount of taxable income.

Annuitants should refer to IRS Publication 575, Pension and Annuity Income,
and Publication 939, General Rule for Pensions and Annuities, for more
information concerning the tax treatment of the contributory amount paid (see
items 6 and 7 below) and use of the employee contributions amount.

6. If an employee contribution amount is shown on my Form RRB-1099-R, may I
use the entire amount?

The employee contribution amount shown is attributable to the railroad
account number. This means that the employee contribution amount must be
shared by all eligible annuitants under that same railroad account number.

If an employee contribution amount is shown on your Form RRB-1099-R and your
annuity beginning date is July 2, 1986, or later, you are an eligible annuitant
who may use some or all of the employee contribution amount shown to compute
the nontaxable (tax-free) amount of your contributory amount paid. Therefore,
your contributory amount paid and total gross paid shown on your Form RRB-1099-
R may be partially taxable.

If an employee contribution amount is not shown on your Form RRB-1099-R, you
are not an eligible annuitant and you cannot use or share the employee
contribution amount. Therefore, your contributory amount paid and total gross
paid shown on your Form RRB1099-R are fully taxable.

When more than one annuitant is or was entitled to a contributory amount
paid under the same railroad account number, any eligible annuitant may not use
the entire employee contribution amount shown on their Form RRB-1099-R for
themselves. They must first determine the amount of the total employee
contribution amount they are individually entitled to use. That means
determining:

1. The portion of the total employee contribution amount still potentially
available for use, and
2. The portion of that amount that must be shared by those eligible annuitants
currently receiving contributory amounts paid.


7. How are contributory and noncontributory pension amounts taxed?

Amounts shown on Form RRB-1099-R are treated like private pensions and taxed
either as contributory pension amounts or as noncontributory pension amounts.
The NSSEB portion of tier I and tier II (shown as the contributory amount paid
on the statement) are contributory pension amounts. Contributory pension
amounts may be fully taxable or partially taxable depending on the presence and
use (recovery) of the employee contribution amount. Vested dual benefits and
supplemental annuities are considered noncontributory pension amounts.
Noncontributory pension amounts are always fully taxable and do not involve the
use of the employee contribution amount.

For annuitants with annuity beginning dates before July 2, 1986, the
contributory amount paid is fully taxable. These annuitants cannot use the
employee contribution amount, even if the amount is shown on Form RRB-1099-R,
to compute a nontaxable amount of their contributory amount paid because their
employee contribution amount has been fully recovered. Since the contributory
amount paid is fully taxable, the total gross pension paid in Item 7 of Form
RRB-1099-R is fully taxable.

For annuitants with annuity beginning dates from July 2, 1986, through
December 31, 1986, the contributory amount paid is partially nontaxable for the
life of the annuitant. These annuitants may use some or all of the employee
contribution amount to compute the nontaxable amount of their contributory
amount paid. Once that nontaxable amount is computed, it does not need to be
recomputed and can be used for each tax year unless there is a change in the
employee contribution amount, annuity beginning date, date of birth used to
determine life expectancy, or the number of eligible annuitants receiving
contributory amounts paid. Therefore, the total gross pension paid in Item 7
of Form RRB-1099-R may be partially taxable.

For annuitants with annuity beginning dates effective January 1, 1987, and
later, the contributory amount paid is partially nontaxable for a specified
period of time based on life expectancy as determined by IRS actuarial tables.
These annuitants may use some or all of the employee contribution amount to
compute the nontaxable amount of their contributory amount paid. Once that
nontaxable amount is computed, it does not need to be recomputed and can be
used for each tax year unless there is a change in the employee contribution
amount, annuity beginning date, date of birth used to determine life
expectancy, or the number of eligible annuitants receiving contributory amounts
paid. Therefore, the total gross pension paid in Item 7 of Form RRB-1099-R may
be partially taxable. However, once the specified life expectancy is met, the
employee contribution amount is considered fully used up, and the contributory
amount paid and total gross pension paid are now fully taxable.

The contributory amounts paid of disabled employee annuitants under minimum
retirement age are fully taxable and these annuitants cannot use the employee
contribution amount. Therefore, the total gross pension paid in Item 7 of Form
RRB-1099-R is fully taxable. (Minimum retirement age is generally the age at
which individuals could retire based on age and service, which is age 60 with
30 or more years of railroad service or age 62 with less than 30 years of
railroad service.) However, once the disabled employee annuitant reaches
minimum retirement age, the annuitant may use the employee contribution amount
shown on Form RRB-1099-R to compute the nontaxable amount of his or her
contributory amount paid.

The RRB does not calculate the nontaxable amount of the contributory amount
paid for annuitants. Annuitants should contact the IRS or their own tax
preparer for assistance in calculating the nontaxable amount of their
contributory amount paid. For more information on the tax treatment of the
contributory amount paid, vested dual benefits, supplemental annuities, the
employee contributions amount, and how to use the IRS actuarial tables,
annuitants should refer to IRS Publication 939, General Rule for Pensions and
Annuities, and IRS Publication 575, Pension and Annuity Income.

8. Does Form RRB-1099-R show the taxable amount of any contributory
railroad retirement benefits or just the total amount of such benefits paid
during the tax year?

Since 1993 (tax year 1992), Form RRB-1099-R shows the total amount of any
contributory railroad retirement benefits (NSSEB and tier II) paid during the
tax year. The RRB does not calculate the taxable amounts. It is up to the
annuitant to determine the taxable and nontaxable (tax-free) amounts of the
contributory amount paid using the employee contributions amount.

9. Can an employee's contributions amount change?

Yes. The employee contributions amount shown on Form RRB-1099-R is based on
the latest railroad service and earnings information available on the RRB's
records. Railroad service and earnings information (and the corresponding
employee contributions amount) often changes in the first year after an
employee retires from railroad service. That is when the employee's final
railroad service and earnings information is furnished to the RRB by his or her
employer. As a result, the employee contributions amount shown on the most
recent Form RRB-1099-R may have increased or decreased from a previously-issued
Form RRB-1099-R.

Any change in an employee contributions amount is fully retroactive to the
railroad retirement annuity beginning date. Therefore, the nontaxable amount
of the contributory amount paid should be recomputed. This could affect the
taxable amounts reported to the IRS on prior income tax returns. Generally,
an increase in the employee contributions amount is advantageous, as it will
yield a larger tax-free amount. However, a decrease in the employee
contributions amount may be disadvantageous since it may result in an increased
tax liability. In any case, annuitants should determine if any change in their
employee contributions amount would require them to file original or amended
Federal income tax returns for prior tax years.

10. What if a person receives social security as well as railroad retirement
benefits?

Railroad retirement annuitants who also received social security benefits
during the tax year receive a Form SSA-1099 (or Form SSA-1042S if they are
nonresident aliens) from the Social Security Administration. They should add
the net social security equivalent or special guaranty amount shown on Form RRB-
1099 (or Form RRB-1042S) to the net social security income amount shown on Form
SSA-1099 (or Form SSA-1042S) to get the correct total amount of these
benefits. They should then enter this total on the Social Security Benefits
Worksheet in the instructions for Form 1040 or 1040A to determine if part of
their social security and railroad retirement social security equivalent
benefits is taxable income.

Additional information on the taxability of these benefits can be found in
IRS Publication 915, Social Security and Equivalent Railroad Retirement
Benefits.

11. Are the residual lump sums, lump-sum death payments or separation
allowance lump-sum amounts paid by the RRB subject to Federal income tax?

No. These amounts are nontaxable and are not subject to Federal income
tax. The RRB does not report these amounts on statements.

12. Are Federal income taxes withheld from railroad retirement annuities?

Yes, and the amounts withheld are shown on the statements issued by the RRB
each year. However, an annuitant may request that Federal income taxes not be
withheld, unless the annuitant is a nonresident alien or a U.S. citizen living
outside the United States.

Annuitants can voluntarily choose to have Federal income tax withheld from
their SSEB payments. To do so, they must complete IRS Form W-4V, Voluntary
Withholding Request, and send it to the RRB. They can choose withholding from
their SSEB payments at the following rates: 7 percent, 10 percent, 15 percent,
or 25 percent.

Annuitants who wish to have Federal income taxes withheld from their NSSEB
and tier II (contributory amount paid), vested dual benefit, and supplemental
annuity payments must complete a tax withholding election on Form RRB W-4P,
Withholding Certificate For Railroad Retirement Payments, and send it to the
RRB. An annuitant is not required to file Form RRB W-4P. If that form is not
filed, the RRB will withhold taxes only if the combined portions of the NSSEB
and tier II (contributory amount paid), vested dual benefit and supplemental
annuity payments are equal to or greater than $1,521.99. In that case, the RRB
withholds taxes as if the annuitant were married and claiming three
allowances.

13. How is tax withholding applied to the railroad retirement benefits of
nonresident aliens?

A nonresident alien is a person who is neither a citizen nor a resident of
the United States. Under the Internal Revenue Code, nonresident aliens are
subject to a 30-percent tax on income from sources within the United States not
connected to a U.S. trade or business. The 30-percent rate applies to all
annuity payments exceeding social security equivalent payments and to 85
percent of the annuity portion treated as a social security benefit. The Code
also requires the RRB to withhold the tax. The tax can be at a rate lower than
30 percent or can be eliminated entirely if a tax treaty between the United
States and the country of residence provides such an exemption, and the
nonresident alien completes and sends Form RRB-1001, Nonresident Questionnaire,
to the RRB. Form RRB-1001 secures citizenship, residency and tax treaty claim
information for nonresident beneficiaries (nonresident aliens or U.S. citizens
residing outside the United States).

Form RRB-1001 is sent by the RRB to nonresident aliens every three years to
renew the claim for a tax treaty exemption. Failure by a nonresident alien to
complete Form RRB-1001 will cause loss of the exemption until the exemption is
renewed. Such renewals have no retroactivity. Also, a nonresident alien must
include his or her United States taxpayer identifying number on Form RRB-1001.
Otherwise, any tax treaty exemption claimed on the form is not valid. The
majority of nonresident aliens receiving annuities from the RRB are citizens of
Canada, which has a tax treaty with the United States.

If a Canadian citizen claims an exemption under the tax treaty, no tax is
withheld from the annuity portion equivalent to a social security benefit and a
withholding rate of only 15 percent is applied to those annuity payments
exceeding social security equivalent payments.

Additional information concerning the taxation of nonresident aliens can be
found in IRS Publication 519, U.S. Tax Guide for Aliens.

14. Are unemployment benefits paid under the Railroad Unemployment
Insurance Act subject to Federal income tax?

All unemployment benefit payments are subject to Federal income tax. Each
January the RRB sends Form 1099-G to individuals, showing the total amount of
railroad unemployment benefits paid during the previous year.

15. Are sickness benefits paid by the RRB subject to Federal income tax?

Sickness benefits paid by the RRB, except for sickness benefits paid for on-
the-job injuries, are subject to Federal income tax under the same limitations
and conditions that apply to the taxation of sick pay received by workers in
other industries. Each January the RRB sends Form W-2 to affected
beneficiaries. This form shows the amount of sickness benefits that each
beneficiary should include in his or her taxable income.

16. Does the Board withhold Federal income tax from unemployment and
sickness benefits?

The RRB withholds Federal income tax from unemployment and sickness benefits
only if requested to do so by the beneficiary. A beneficiary can request
withholding of 10 percent of his or her unemployment benefits by filing Form W-
4V with the Board. A beneficiary can request withholding from sickness
benefits by filing Form W-4S.

17. Are railroad retirement and railroad unemployment and sickness benefits
paid by the RRB subject to State income taxes?

The Railroad Retirement and Railroad Unemployment Insurance Acts
specifically exempt these benefits from State income taxes.

18. Can a railroad employee claim a tax credit on his or her Federal income
tax return if the employer withheld excess railroad retirement taxes during the
year?

If any one railroad employer withheld more than the annual maximum amount,
the employee must ask that employer to refund the excess. It cannot be claimed
on the employee's return.

19. Can a railroad employee working two jobs during the year get a tax
credit if excess retirement payroll taxes were withheld by the employers?

Railroad employees who also worked for a nonrailroad social security covered
employer in the same year may, under certain circumstances, receive a tax
credit equivalent to any excess social security taxes withheld.

Employees who worked for two or more railroads during the year, or who had
tier I taxes withheld from their RRB sickness benefits in addition to their
railroad earnings, may be eligible for a tax credit of any excess tier I or
tier II railroad retirement taxes withheld. The amount of tier I taxes
withheld from sickness benefits paid by the RRB is shown on Form W-2 issued to
affected beneficiaries. Employees who had tier I taxes withheld from their
supplemental sickness benefits may also be eligible for a tax credit of any
excess tier I tax.

Such tax credits may be claimed on an employee's Federal income tax return.

Employees who worked for two or more railroads, received sickness benefits,
or had both railroad retirement and social security taxes withheld from their
earnings should see IRS Publication 505, Tax Withholding and Estimated Tax, for
information on how to figure any excess railroad retirement or social security
tax withheld.
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