Do You Pay State Taxes on Railroad Retirement?
The Railroad Retirement Board (RRB) is an independent federal agency that oversees the retirement and unemployment benefits programs for railroad workers and their families. Railroad retirement payments are subject to federal income taxes, which the RRB will withhold at the request of a recipient. However, railroad retirement and unemployment benefits are exempt from state income taxes, which benefits retirees who reside in states that levy an income tax.
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Identification
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The Railroad Retirement Act and the Railroad Unemployment Insurance Act, the federal laws that authorized and established the railroad retirement system, state that railroad retirement, illness and unemployment payments are exempt from state income taxes. This means that state income taxes will not be withheld from benefits paid to retired railroad workers. However, retirees will have to pay other state taxes, such as state sales taxes levied on retail sales at the time of purchase.
Warning
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Although benefits paid by the railroad retirement system are exempt from state income taxes, they are subject to federal income taxes. The RRB reports that the Internal Revenue Service treats railroad retirement benefits like Social Security payments for federal income tax purposes.
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Geography
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The website Retirement Living reports that 41 of the 50 states in the U.S. levy a personal income tax, which means railroad retirees in these states will not have to pay state income taxes on their benefits. Of the remaining nine states, New Hampshire and Tennessee apply it only to income generated by interest and dividends on investments. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming do not levy a state income tax.
History
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Legislation passed by Congress in the 1930s created the RRB and established a retirement system for railroad workers. The RRB reported that pension plans were more developed in the railroad industry than in other business sectors, but that the plans had serious defects that the Great Depression of the 1930s exacerbated. In 2010, the railroad retirement system paid more than $10 billion in benefits to more than 580,000 beneficiaries.
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