Executive Summary: Social Security & Railroad Deduction



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Executive Summary:

Social Security & Railroad Deduction

(Income Tax)

July, 2014

Joint Subcommittee to Evaluate Tax Preferences

  • Preference:


§ 58.1-322 (C)(4)


  • Summary:

In calculating Virginia adjusted gross income, a taxpayer is allowed a subtraction for Social Security benefits and certain federal railroad retirement benefits, to the extent such income was included in the taxpayer's federal adjusted gross income.




  • Revenue Impact:

The subtraction accounts for approximately $304.0 million in reduced state tax revenues (Tax Year 2011).




  • Joint Subcommittee Recommendation:

(to be completed after joint subcommittee meeting)




Preference Report:

Social Security & Railroad Deduction

(Income Tax)

July, 2014

Joint Subcommittee to Evaluate Tax Preferences

Preference Description

Subdivison C 4 of § 58.1-322 of the Code of Virginia allows a taxpayer to subtract, to the extent included in his federal adjusted gross income, "[b]enefits received under Title II of the Social Security Act and other benefits subject to federal income taxation solely pursuant to § 86 of the Internal Revenue Code" for purposes of determining his Virginia taxable income.

The benefits referred to in § 86 of the Internal Revenue Code are Tier I Railroad Retirement benefits, a program established in the 1930's to provide federal retirement for railroad workers. These benefits were designed to be equivalent to the annuity offered by Social Security, and are reduced by any Social Security payments that a beneficiary might receive. Thus, the benefits are treated the same for federal tax purposes.

A portion of Social security and Tier I railroad retirement benefits are taxable under federal law, based upon income. For a single taxpayer, if one-half of his benefits plus all other income, including tax-exempt interest, exceeds a base amount of $25,000, a portion of benefits will be taxable. For married couples filing jointly, the base amount is $32,000. Depending on income, up to 85 percent of the benefits may be taxable. The subtraction found at subdivision C 4 of § 58.1-322 allows this taxable amount of income included in the taxpayer's federal adjusted gross income -- not the entirety of the taxpayer's benefit -- to be subtracted in determining his Virginia taxable income.

Preference Purpose

Prior to changes in federal law in 1984, Social Security and Tier I railroad retirement benefits were not considered taxable income. The state subtraction was enacted when a portion of such benefits became a part of federal adjusted gross income for tax purposes. Ostensibly, this change was implemented to maintain the historical status quo in Virginia that these retirement benefits were not subject to state taxation.

Legislative History & Background


1983: The Virginia General Assembly enacted a subtraction, to the extent included in federal adjusted gross income, for "[b]enefits received under Title II of the Social Security Act."1
1984: The subtraction was amended in 1984 to also include Tier I railroad retirement benefits.
The subtraction has not been further amended since 1984.
Revenue Impact

Tax year 2011 individual income tax returns show that 434,290 taxpayers claimed on average $12,863 in social security and tier 1 railroad retirements benefits for a total of $5.6 billion. Based on TAX individual model which calculates the income tax liability for each return, the revenue impact of the tax preference was estimated at $304 million for an average amount of $700 per return. The tax preference encompasses social security and tier 1 railroad retirement benefits. Tier 1 railroad retirement benefits revenue impact was estimated at $3.2 million based on monthly data reported by the Railroad Retirement Board and the Social Security administration. Tier 1 railroad retirement benefits subtraction could not be repealed.








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