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Did You Overpay Your State Income Taxes in Railroad Retirement? Thumbnail

Did You Overpay Your State Income Taxes in Railroad Retirement?

Tier 1 Tier 2 Video Retirement Taxes


Avoid this common occurrence when you're filing your state income taxes with Railroad Retirement.

Welcome everyone to another edition of the Highball Advisors, Railroad Retirement Whiteboard. My name's John McNamara, Highball Advisors. And today we're going to talk about taxes. Specifically, state income taxes. All right. So there's quite a few states that have no income tax, so that's great. Your Texas, New Hampshire, Nevada, who else is out there, Tennessee, I believe, I think Washington state. You can look that up. All right. So you don't have to worry about this.

However, it's important to remember that Railroad Retirement is not taxable by any state. All right. That's the rule. That's the law. Actually, there's 13 states that can tax Social Security. All right. So if you're in one of those 13 states that tax Social Security, all right, make sure they're not taxing your Railroad Retirement. That's very, very important. But what I want to talk about here is what happens to career railroaders that have 30 years of service, let's say, and there's two ways that Railroad Retirement gets reported.

It's you have a SSEB, which is Social Security Equivalent Benefit. So that looks and walks and talks like a Social Security payment. And then you have non-Social Security Equivalent Benefit, right? That's the additional money, you find the tier two portion there. However, there's also the tier one portion is in there. Okay. So that would be for... Because that's the part that if you're at full retirement age, and let's say you're a Social Security worker, you'd be 67 and you would get your amount of money, your Social Security, or SSEB. However, at 60 you're getting paid like you're 67. That's the advantage of working for the railroad is you get that extra seven years. However, they got to make up the difference. And they do that through a non-Social Security Equivalent Benefit.

So the point that I want to talk about here is this NSEB all right, which is very, very important. Is what happens is this gets paid inside a 1099R right, which is the tier one non-Social Security Benefit in the tier two. And what happens is a lot of people will get reported as a pension because on the federal returns, you have to remember federal returns, this gets taxed at ordinary income. All right. So now you have this being taxed at ordinary income and this amount being taxed at ordinary income also. However, when that gets transferred over to your state, you want to make sure that that amount of money does not get reported on your tax returns. 

So that could be a really big savings. So if your income on your federal tax returns, it might show, let's just say $100,000, because you're including these two pension payments here, but on your state return, it should be, if this adds up to $20,000, your state return should only be taxed off of $80,000. All right. And what happens is a lot of accountants and CPAs, they just co carry over that taxable income number from the state, from the federal and bring it over to state without realizing that your Railroad Retirement isn't taxable, especially this amount here, the non-Social Security Equivalent Benefit.

So I just want to draw that to your attention, really, really important stuff with that. And now, so when you're doing your taxes, you get the two forms. You get the 1099R, which is the tier one NSSEB, and the tier two. And then you also get the RRB1099, which is the tier one, which looks like Social Security. So, maybe go back, look at a couple of old tax returns. You have a couple years, you can even refile. I saved one of my clients a couple thousand dollars this year. We're going through that, right. It just slipped and went right through. So that's got to come off the NSSB right? Remember very, very important stuff. 

So hope you found this helpful. Share this video with other railroaders. Get them thinking about taxes, right? I don't want you guys overpaying your taxes, especially in retirement, every penny counts that's for sure. Click on the subscribe to subscribe to my YouTube channel. Really do appreciate it. It's growing very well. Click on notifications. Get the latest video. I usually send them out every Tuesdays and Thursdays. And until next time, everyone, please stay safe, stay on track, and take care. So long everybody. Bye.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved from Highball Advisors, and all rights are reserved.