Could an Illinois taxpayer subtract federally taxable Railroad Retirement Board sickness benefits, and where were they reported?

Plain-English summary

Railroad Retirement Board sickness benefits included in federal adjusted gross income could be subtracted for Illinois tax. Section 203(a)(2)(N) removed amounts that federal law prohibited Illinois from taxing.

The Railroad Unemployment Insurance Act stated that its benefits were not subject to any state tax, and Illinois Regulation 100.2470(c) included that Act in its exhaustive exempt-income list. IDOR directed the taxpayer to claim the subtraction on IL-1040 Line 5.

What this means for you

Distinguish sickness benefits from railroad unemployment and retirement payments, and retain the federal information return showing the benefit and its inclusion in federal income.

Common questions

Q: Did the taxpayer need Form 1099-G for this sickness benefit?
A: The GIL addressed sickness benefits reported without a 1099-G and directed the subtraction to IL-1040 Line 5.

Q: Why could Illinois not tax the benefit?
A: Federal law prohibited state taxation of benefits under the Railroad Unemployment Insurance Act.

Citations and references

• 35 ILCS 5/203(a)(2)(N)
• 45 U.S.C. § 352(e)
• 86 Ill. Adm. Code 100.2470(c)(18)

Subject

Subtraction Modifications – Other Rulings

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2012/it-12-0026.pdf

Original ruling text

IT 12-0026-GIL 09/13/2012 SUBTRACTION MODIFICATIONS – OTHER RULINGS
General Information Letter: Federal law prohibits state taxation of sickness benefits
paid under the Railroad Retirement and Unemployment Insurance Act, so any amount
of these benefits included in adjusted gross income of a taxpayer may be subtracted in
computing base income.
September 13, 2012
Dear:
This is in response to your letter email dated April 10, 2012 in which you state the following:
After reviewing the tax code we feel Illinois is not subtracting Railroad Retirement
Sickness Benefits correctly and would like some guidance from the state as to whether
or not they agree with our research.
Sickness benefits paid under the Railroad Retirement and Unemployment Insurance
Acts are not taxable by states. See attached 45 USC §352(e), 45 USC §231m, and
Railroad Retirement Board Publication 1202, Pg 4, No. 18 (Feb 2010).
IL 1040 provides for a subtraction to income for railroad retirement plans and railroad
retirement benefits.
IL Schedule M provides for a subtraction for Railroad
unemployment income at line 35 and states to attach form 1099G. It further states to
not include retirement or third party sick pay on line 35. See attached Il 1040
Instructions, IL Sch M Instructions.
Sickness benefits paid by the U.S. Railroad Retirement Board under the Railroad
Unemployment Insurance Act are “third-party sick pay” because it comes from the
Railroad Retirement Board and not directly from the taxpayer’s employer, the railroad
company. If a taxpayer receives only sickness benefits (and not unemployment
benefits) from the Railroad Retirement Board, he will receive only a W-2 showing the
amount of sickness benefits. The taxpayer will not receive a 1099G unless he also
receives unemployment benefits in addition to sickness benefits. See attached RRB
Form UB-9 Publication pg 14. The sickness benefits are not taxable by states, but are
included in federal income and therefore must be subtracted from state income.
Therefore, where does an IL taxpayer who receives sickness benefits from the Railroad
Retirement Board subtract the nontaxable sickness benefits from his Illinois return? Is it
done on IL 1040 Line 5 or IL Sch M?
For a state example, see the attached for how North Carolina handles the railroad
sickness benefit pay. Included are the NC D-400 and Instructions showing that
sickness benefits are subtracted on line 44 which would be equivalent to subtracting on
line 5 of the IL 1040 (as railroad retirement benefits). See attached NC D-400
Instructions Line 44 page 13 and IL 1040 Line 5 instructions. For ease of reading the
attachments, relevant portions have been highlighted and some non-relevant document
pages have been removed.
According to the Department of Revenue (“Department”) regulations, the Department may issue only
two types of letter rulings: Private Letter Rulings (“PLR”) and General Information Letters (“GIL”).
The regulations explaining these two types of rulings issued by the Department can be found in 2

IT 12-0026-GIL
September 13, 2012
Page 2
Ill.Adm.Code §1200, or on the website http://www.tax.illinois.gov/LegalInformation/regs/part1200.
Due to the nature of your inquiry and the information presented in your letter, we are required to
respond with a GIL. GILs are designed to provide background information on specific topics. GILs,
however, are not binding on the Department.
An individual’s base income for Illinois income tax liability is the taxpayer’s federal adjusted gross
income as modified by certain addition and subtraction modifications set forth in Section 203 of the
Illinois Income Tax Act (“IITA;” 35 ILCS 5/101 et seq.). One such modification allowed as a reduction
to base income in arriving at net income is any amount included in federal adjusted gross income
which is exempt from State tax by federal law. The statutory language can be found in IITA Section
203(a)(2)(N):
(N)
An amount equal to all amounts included in such total which are exempt from
taxation by this State either by reason of its statutes or Constitution or by reason of the
Constitution, treaties or statutes of the United States; provided that, in the case of any
statute of this State that exempts income derived from bonds or other obligations from
the tax imposed under this Act, the amount exempted shall be the interest net of bond
premium amortization;
As you point out in your letter, sickness benefits paid under the federal Railroad Unemployment
Insurance Act, 45 U.S.C. Section 352(e), are not taxable by states:

352. Benefits
     …
     (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.
     The Department regulations, specifically 86 Ill.Admin.Code 100.2470(c), provides a list that is
     intended to be exhaustive of exempt income along with the specific statutes to which each exempt
     income item relates. The Railroad Unemployment Insurance Act is included in paragraph 18 of
     Section 2470(c). Your client may therefore subtract the nontaxable sickness benefits from his Illinois
     return on IL-1040 Line 5.
     As stated above, this is a general information letter which does not constitute a statement of policy
     that either applies, interprets or prescribes tax law. It is not binding on the Department. Should you
     have additional questions, please do not hesitate to contact our office.
     Sincerely,

Heidi Scott
Associate Counsel -- Income Tax