How the Elimination of Social Security Tax Affects Your Railroad Retirement

There's been some buzz about potentially eliminating taxes on Social Security benefits. But how would that impact your Railroad Retirement? Welcome to another edition of the Highball Advisors Railroad Retirement Whiteboard. I'm John McNamara with Highball Advisors, and today, we're going to take a look at this idea and what it might mean for you. While no official proposals have been made at the time of this recording, it's something that's been coming up in discussions—especially around election time—so let's dive in.

For those of you new to Railroad Retirement, let's quickly go over the basics. Railroad retirement has two components: Tier 1 and Tier 2. Today, we’re specifically focusing on Tier 1. Think of Tier 1 like Social Security, with a few benefits unique to railroaders. For Tier 1, the calculation is based on your top 35 years of earnings, combining both your railroad and Social Security work years. Tier 2, on the other hand, is based on the number of months you've worked in the railroad industry and takes your top 60 months of earnings to determine the benefit. Tier 2 is more like a pension, taxed as ordinary income.

Also worth noting: there’s no state tax on Railroad Retirement benefits, which is a big plus.

Now, what does all this mean if they eliminate taxes on Social Security benefits? Here’s how it works with Tier 1: Right now, up to 85% of your Tier 1 (Social Security equivalent) benefit is taxable. It’s not taxed at 85%, but rather 85% of the amount you receive. The way it’s broken down is like this:

• If you’re married and your taxable income is under $32,000, your Tier 1 benefit is not taxed.
• Between $32,000 and $44,000, 50% of your Tier 1 is taxable.
• If your income exceeds $44,000, then 85% of your Tier 1 benefit is taxable.

It’s important to understand that it’s a “cliff”—once you cross a certain threshold, the entire benefit becomes taxable at the higher rate, unlike a marginal tax rate where income is taxed in chunks.

Now, let’s break this down with an example to see what kind of tax savings you might see if the Tier 1 taxes were eliminated. Let’s assume a married couple where the railroader receives $3,500 monthly from Tier 1, and $1,500 monthly from Tier 2. The spouse gets half of the Tier 1 benefit ($1,750) and 45% of the Tier 2 benefit ($675). That totals $7,425 in monthly income, or $89,100 annually.

After applying the standard deduction of $30,000, their taxable income would be $59,100. With Tier 1, 85% of $3,500 (or $2,975) is taxable. Under the current system, this means they’d pay tax on that taxable amount. The tax liability is roughly $6,000 a year on the Tier 1 portion alone.

If the tax on Tier 1 were eliminated, this couple would save nearly $6,000 annually. That’s a significant amount, especially for retirees. Of course, Tier 2 is still taxed as ordinary income, so it wouldn’t be affected by this potential change.

In summary, the elimination of taxes on the Tier 1 portion of your Railroad Retirement would result in considerable tax savings—about $6,000 for this example. If you're planning for retirement, understanding your tax situation is crucial. Tax planning is a big part of preparing for retirement, and I help many railroaders navigate this.

If you're approaching retirement or just want to learn more about Railroad Retirement and taxes, feel free to reach out. Share this video with other railroaders in your network, and don’t forget to subscribe to my channel for more helpful information. I really appreciate your support as the channel grows.

Until next time, stay safe, stay on track, and take care! So long, everybody.

Get Free Railroad Retirement Assessment

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.