INCOME TAX - RAILROAD EMPLOYEE BENEFITS

(Replaces Revenue Administrative Bulletin 1989-57)

RAB-91-13. This bulletin describes the Michigan income tax treatment of railroad employee benefits received by a resident taxpayer. It updates Revenue Administrative Bulletin 1989-57 to reflect the repeal of section 441 of the Income Tax Act [MCL 206.441; MSA 7.557(1441)] by Public Act 285 of 1990. It refers instead to section 27a of the revenue act [MCL 205.27a; MSA 7.657(27a)] for the law governing refunds.

TIER I RAILROAD RETIREMENT BENEFIT, RAILROAD RETIREMENT ACT (RRA) OF 1974, 45 USC 231 ET SEQ.

Federal Treatment

Beginning in tax year 1984, a portion of a taxpayer's "Tier I railroad retirement benefits" may be taxable and may be included in federal adjusted gross income under the Internal Revenue Code of 1986, Section 86.

Michigan Treatment

To the extent that a taxpayer includes Tier I railroad retirement benefits in his or her federal adjusted gross income, he or she may deduct the same amount in determining Michigan taxable income under the Michigan Income Tax Act. [MCL 206.30(l)(f)(iii); MSA 7.557(130)(1)(f)(iii)]

OTHER RAILROAD RETIREMENT ACT BENEFITS, TIER II RAILROAD RETIREMENT ACT OF 1974

Federal Treatment

Benefits provided under the Railroad Retirement Act (RRA) of 1974 (other than a Tier I railroad benefit) shall be treated as a benefit under an employer plan which meets the requirements of the Internal Revenue Code of 1986, Sections 72(r) and 401(a).

Notwithstanding the foregoing categorization of these benefits, Section 14 of the Railroad Retirement Act of 1974, 45 USC 231m, provides:

(a) Except as provided in subsection (b) of this section and the Internal Revenue Code of 1954 [26 USCS section 1 et seq.], notwithstanding any other law of the United States, or of any State, territory, or the District of Columbia, no annuity or supplemental annuity shall be assignable or be subject to any tax or to garnishment, attachment, or other legal process under any circumstances whatsoever, nor shall the payment thereof be anticipated.

(b) This section shall not operate to exclude the amount of any supplemental annuity paid to an individual under section 2(b) of this Act [45 USCS section 23la(b)] from income taxable pursuant to the federal income tax provisions of the Internal Revenue Code of 1954. [26 USCS section 1 et seq.]

Therefore, railroad benefits other than Tier I benefits are subject to federal income taxation pursuant to the Railroad Retirement Act, 45 USC 231m(b). However, these benefits are not subject to any other tax of a state, territory, or the District of Columbia. [45 USC 231m(a)]

Michigan Treatment

To the extent a taxpayer has included these benefits in federal adjusted gross income, the taxpayer may deduct such amount from Michigan taxable income.

UNEMPLOYMENT AND SICK BENEFITS, RAILROAD UNEMPLOYMENT INSURANCE ACT, 45 USC 351 ET SEQ.

Federal Treatment

As a general rule, post-1986 unemployment compensation benefits are subject to federal income taxation.(See IRC Section 85.) However, the Railroad Unemployment Insurance Act, 45 USC 351 et seq., exempts payments under its provisions from all taxation. Specifically, 45 USC 352(e) provides:

(e) Assignment, taxation, garnishment, attachment, etc., of benefits. Notwithstanding any other law of the United States, or of any State, territory, or the District of Columbia, no benefits shall be assignable or be subject to any tax or to garnishment, attachment, or other legal process under any circumstances whatsoever, nor shall the payment thereof be anticipated.

Therefore, unemployment compensation benefits paid to a person pursuant to the Railroad Unemployment Insurance Act are not subject to federal income taxation.

Sick pay is included in a taxpayer's gross income, except to the extent such sickness is the result of on-the-job injury as defined under the IRC 105(a) and (c).

Michigan Treatment

Pursuant to the above-cited provision [45 USC 352(e)] Railroad Unemployment Insurance Act benefits are not subject to Michigan income tax. To the extent that a taxpayer has included these benefits in federal adjusted gross income, the taxpayer may deduct the amount from Michigan taxable income.

Sick pay is taxable to Michigan to the extent such income has been included in arriving at federal adjusted gross income. There is no provision to allow for its subtraction on the Michigan return.

TITLE VII BENEFITS, RAILROAD REORGANIZATION ACT, 45 USC 797 ET SEQ.

Federal Treatment

Benefits provided under Title VII of the Railroad Reorganization Act (e.g., termination allowances) are in the nature of compensation and subject to federal income tax when received. (See Internal Revenue Code Section 61(a) and Sutherland v Commissioner of Internal Revenue, 865 F2d 56 (CA 3, 1989).)

Michigan Treatment

Michigan taxable income is federal adjusted gross income subject to several adjustments. (See MCL 206.30; MSA 7.557(130). Because benefits provided under Title VII of the Railroad Reorganization Act are included in federal adjusted gross income, these benefits are included in Michigan taxable income.

REFUNDS

Any taxpayer who has included in Michigan taxable income Railroad Retirement Act benefits (either Tier I or II) or Railroad Unemployment Insurance Act benefits may file for a refund of taxes paid on those benefits. Section 27a(2) of the revenue act [MCL 205.27a(2); MSA 7.657(27a)(2)] permits a taxpayer to file an amended return to claim a refund of taxes overpaid. The amended return must be filed within 4 years from the date set for filing the original return.