DIRECTIVE: Neither Tier I nor Tier II railroad employee retirement benefits are subject to the Massachusetts personal income tax.
DISCUSSION OF LAW:
The basic railroad retirement benefit available to retired railroad employees consists of two "tiers." Tier I benefits are equivalent to social security benefits and are similarly financed with an equal payroll tax paid by both employee and employer.  Tier II benefits are amounts in addition to the Tier I benefits and are financed through a payroll tax, the majority of which is paid by the employer. 
Massachusetts gross income is federal gross income with certain modifications. G.L. c. 62, § 2(a). Taxpayers whose gross income exceeds a federal limit must include a portion of their Tier I railroad retirement benefits in their federal gross income. I.R.C. § 86. However, Massachusetts allows a deduction from federal gross income in determining Massachusetts gross income for Tier I railroad retirement benefits that are included in federal gross income under I.R.C. § 86. G.L. c. 62, § 2(a)(2)(H) (under I.R.C. § 86, the term "social security benefits" includes Tier I railroad retirement benefits).
Starting in 1984, any benefit provided under the Railroad Retirement Act of 1974 (other than a Tier I railroad retirement benefit) became subject to federal income taxation under I.R.C. § 72(r). However, these Tier II railroad benefits are exempt from state taxation under federal law. 45 U.S.C. § 231m.
Commissioner of Revenue
February 2, 1993
 H.R. REP. No. 98-30 Part I, 98th Cong., 1st Sess., reprinted in 1983 U.S. Code Cong. & Admin. News 729, 733-734.
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