No change in federal income tax provisions

The enactment of Public Law 107-90 (H.R. 10) did not change the way railroad retirement annuity payments are treated under Federal income tax provisions.

For Federal income tax purposes, most Railroad Retirement Act annuities are divided into two components. The first component is the amount, if any, which is equivalent to what the annuitant would have received under the Social Security Act if rail service had always been covered by that Act instead of the Railroad Retirement Act. The second annuity component for Federal income tax purposes is the amount, if any, in excess of what social security would have paid to the annuitant if it had always covered rail service.

The annuity component that is equivalent to a social security benefit is taxed like a true social security benefit. The part of the annuity that exceeds what social security would pay is taxed like a private pension. This is an important distinction because the effective tax rate on social security benefits is lower than the effective tax rate for private pensions. Private pension payments, after adjustment to compensate for previously taxed contributions made to the pension plan by employees during their working years, are taxed like ordinary income.

When a rail employee receives an annuity before age 62 on the basis of 30 or more years of service, or because of an occupational disability, no part of the annuity is equivalent to a social security benefit. This is true because social security does not pay benefits based on age to anyone before age 62, and it does not pay occupational disability benefits. Thus, the entire annuity amount paid to an employee before age 62 based on age or occupational disability exceeds the amount that would be payable under the Social Security Act and is taxed like a private pension. This situation changes when the individual attains age 62. At that point, a part of the annuity immediately becomes equivalent to what a reduced age social security benefit would be. That portion of the annuity is thereafter subject to the more lenient tax provisions applicable to social security benefits.

As a result of enactment of H.R. 10, annuities awarded to individuals on or after January 1, 2002, on the basis of 30 or more years of rail service will not be reduced when individuals are under age 62. Such an unreduced 30/60 annuity, just like a reduced 30/60 annuity, will not have a social security equivalent component until the annuitant attains age 62. Until then, the entire annuity amount will be taxed like a private pension.

After the individual attains age 62, a part of the annuity will be taxed under the more lenient tax provisions applicable to social security benefits. However, before and after attaining age 62, employees receiving unreduced annuities will have more income subject to tax than they would if they received reduced annuities. This is true because they will be receiving more money, not because of any change in the way Federal income tax provisions apply to Railroad Retirement Act annuity payments.

Finally, provisions of the Railroad Retirement Act have long exempted annuities from State income tax. This was not changed by H.R. 10.

 

2002 Brotherhood of Locomotive Engineers