BNSF News

Railroad Retirement Board Answers Questions about Income Tax and Benefits

2010-02-04

Note: This is the second story of two about tax statements from the Railroad Retirement Board. Any questions about the statements should be referred to your local Railroad Retirement Board Office. Questions about your personal finances, including taxes and retirement, should be referred to your personal financial adviser.

The Railroad Retirement Board (RRB) has released questions and answers about tax statements for federal income tax purposes.

Statements are issued each January. Railroad Retirement beneficiaries who need information about these statements or tax withholding from their benefits should contact their RRB. For further federal income tax information, Railroad Retirement beneficiaries should contact the nearest office of the Internal Revenue Service (IRS).

• 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.

• If an annuity was due but unpaid at the time of an annuitant's death, it may be payable to another person. Would that person be subject to federal income tax on this annuity?

Yes, the person would be subject to federal income tax on this annuity if the deceased annuitant was to pay federal income tax on the benefit. The taxable amount of the annuity is reported to the IRS and on Form RRB-1099 (or Form RRB-1042S) or Form RRB-1099-R, as appropriate, which is sent to the person who received the annuity.

• 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 50 states or Washington, D.C.

Annuitants can voluntarily choose to have federal income tax withheld from their Social Security equivalent benefit (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 are taxed as U.S. citizens and who do not live outside the 50 states or Washington, D.C., and wish to have federal income taxes withheld from their non-Social Security equivalent benefit (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 $2,063.51. In that case, the RRB withholds taxes as if the annuitant were married and claiming three allowances.

• 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 Internal Revenue 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 SSEB portion of tier I and a tax withholding rate of 15 percent is applied to the benefit portions treated like pension payments.

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

• 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.

• 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.

• Does the RRB 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 IRS Form W-4V, Voluntary Withholding Request, with the RRB. A beneficiary can request withholding from sickness benefits by filing IRS Form W-4S, Request for Federal Income Tax Withholding from Sick Pay.

• 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.

• 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.

• 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 (benefits paid under an RRB-approved nongovernmental sickness insurance plan, such as a supplemental sickness benefit plan established by a railroad) 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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