Executive Summary: Social Security & Railroad Deduction

Distribution of Social Security and Tier 1 Railroad Retirements Benefits by filing status

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Distribution of Social Security and Tier 1 Railroad Retirements Benefits by filing status

Taxpayers who file a joint return claimed the majority of the income tax preference. Their income tax liability is reduced by an average estimated amount of $801.

*For nonresidents, the amount claimed has been adjusted to reflect VA portion of the tax preference.

Other States

Of the 41 states that have an income tax, 28 states (including Virginia) and the District of Columbia, provide for the full subtraction of Social Security and Tier I railroad retirement benefits.3 The remaining 13 states take a variety of approaches to taxing the benefit income:

  • Connecticut, Kansas, and Missouri have established income-based exemptions, whereby the entire amount of the benefit may be subtracted if federal adjusted gross income is below a certain threshold. For example, Kansas allows a full exemption if the taxpayer's federal adjusted gross income is $75,000 or less, regardless of filing status.

  • Colorado, Utah, and West Virginia provide an exemption or credit for retirement income that can be used to avoid paying taxes on Social Security income. For example, Colorado taxpayers age 65 and older may exclude up to $24,000 of retirement earnings from state taxes. Utah allows retired taxpayers age 65 or older to claim a nonrefundable tax credit of up to $450 ($900 for married couples) to offset taxes on Social Security benefits.

  • Minnesota, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, and Vermont tax all of the benefits included in federal adjusted gross income.

Other Information

Social Security benefits and Tier I railroad benefits also interact with another Virginia-based income deduction. Pursuant to subdivision D 5 b of ยง 58.1-322, taxpayers born on or between January 2, 1939 and January 1, 1948 may be eligible to claim an income-based age deduction of up to $12,000. The amount of the deduction is based on a sliding income scale. For purposes of determining the amount of the deduction, a taxpayer's income is based on his federal adjusted gross income minus any Social Security benefits or Tier I railroad retirement benefits.

In addition to the Tier I railroad benefits discussed herein, some taxpayers are eligible for additional railroad retirement benefits referred to as "Tier II railroad retirement benefits." These Tier II benefits were created enacted by the United States Congress in the Railroad Retirement Act of 1974, and are comparable to private pension plans. The federal Act prohibits state taxation of Tier II benefits. As a result, there is nothing in the Code of Virginia that specifically references the taxation (or exclusion from taxation) of these benefits. However, the Virginia Administrative Code does indicate that these benefits shall be subtracted from federal adjusted gross income in computing Virginia taxable income.4 Data from Tax Year 2011 indicates that a subtraction for Tier II benefits was claimed on 6,534 returns, with an estimated revenue impact of $2.89 million dollars.

*For nonresidents, the amount claimed has been adjusted to reflect VA portion of the tax preference.

Joint Subcommittee Recommendation

(to be completed after Joint Subcommittee meeting)

Preference Report Compiled by Staff from the Virginia Division of Legislative Services and the Virginia Department of Taxation

1 Chapter 472 of the Acts of Assembly of 1983.

2 The income groups used in this analysis are not equivalent to the income groups used in the federal Consumer Expenditure Survey.

3 Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not have an individual income tax. Tennessee and New Hampshire do not tax income or Social Security, but do tax interest and dividends.

4 23 VAC 10-110-142(5).

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