NE 22-88-5 Individual Income Tax 1988-09-19

Do I owe Nebraska income tax on a lump-sum payment I got from the railroad as an early-retirement incentive?

Short answer: Yes — it's taxable. Under Revenue Ruling 22-88-5, individuals who receive lump-sum railroad payments as incentives for early retirement must include those distributions as income for Nebraska individual income tax purposes. The IRS treats such lump-sum distributions as 'severance or termination pay,' taxable as compensation in federal gross income; because Nebraska taxable income starts from federal adjusted gross income, the payments carry through to the Nebraska return. Crucially, these payments are NOT distributions under the Railroad Retirement Act, so — unlike railroad retirement benefits — they cannot be claimed as a Nebraska adjustment (subtraction). Signed by State Tax Commissioner John O. Boehm.

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This page answers the general question as of 1988. Ezel answers yours, under current Nebraska tax law, with citations.

Disclaimer: This is an official Revenue Ruling of the Nebraska Department of Revenue, a guidance document stating the Department's interpretation of how Nebraska tax law applies. Each Nebraska guidance document carries the notice that it 'is advisory in nature but is binding on the Nebraska Department of Revenue until amended.' Unlike a private letter ruling, a Revenue Ruling is a general statement of Department policy rather than advice to a single taxpayer, but it can be amended, superseded, or made obsolete by a later ruling or a change in statute or regulation, many rulings in this series have been rescinded or superseded, so confirm it is still in effect before relying on it. Nebraska's local option sales and use taxes are administered by the Department, not self-collected by home-rule cities. This summary is informational only and is not legal or tax advice. Consult a licensed Nebraska tax professional about your situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.

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Plain-English summary

This ruling is the counterpart to Nebraska's treatment of ordinary railroad retirement benefits. When a railroad offers workers a lump-sum payment to retire early, is that payment taxed by Nebraska?

The holding: yes. Individuals who receive lump-sum railroad payments as incentives for early retirement must include those distributions as income for Nebraska individual income tax purposes.

Why: the IRS treats these lump-sum distributions as "severance or termination pay" — taxable as compensation included in federal gross income. Since Nebraska taxable income starts from federal adjusted gross income (AGI), the payment flows straight through to the Nebraska return.

The key distinction: these early-retirement buyout payments are not distributions under the Railroad Retirement Act. Genuine railroad retirement benefits (Tier I/Tier II) and RRB unemployment/sickness benefits are exempt from Nebraska tax and can be subtracted from federal AGI — but an early-retirement incentive is severance compensation, not a Railroad Retirement Act distribution, so it cannot be claimed as a Nebraska adjustment. It stays in Nebraska taxable income.

Signed by State Tax Commissioner John O. Boehm in September 1988.

What this means for you

Railroad workers who took an early-retirement buyout

Don't assume your railroad payment is tax-free just because it came from the railroad. A lump-sum early-retirement incentive is taxable severance pay for both federal and Nebraska purposes — it's in your federal AGI and stays in your Nebraska income. You can't subtract it the way you could subtract actual railroad retirement benefits.

Tax preparers with railroad clients

Distinguish the source: Railroad Retirement Act benefits (retirement, unemployment, sickness) are a Nebraska decreasing adjustment; an early-retirement incentive/severance lump sum is not — it's compensation that remains taxable in Nebraska.

Common questions

Q: Is a lump-sum railroad early-retirement incentive taxable in Nebraska?
A: Yes. It must be included as income for Nebraska individual income tax purposes.

Q: Can I subtract it like railroad retirement benefits?
A: No. It isn't a distribution under the Railroad Retirement Act — it's severance/termination pay — so it can't be claimed as a Nebraska adjustment.

Q: Why is it taxable?
A: The IRS treats it as severance or termination pay included in federal gross income, and Nebraska taxable income begins with federal adjusted gross income.

Citations and references

Railroad Retirement Act — named for contrast: because the payment is not a distribution under this Act, it isn't eligible for the Nebraska adjustment that genuine railroad retirement benefits receive.
No Nebraska statute section is cited within the text of this ruling; it turns on the federal characterization of the payment and Nebraska's use of federal AGI as its starting point.

Source

Original ruling text

Revenue Ruling 22-88-5

Individual fncome Tax. - Tâx Treatment of Lump Sum Railroad
Distributions as Incentives for Early Retirement. INDMDUÀIS
WHO RECEIVE LI'}ÍP ST'I'Í R.AILROÀD PAY.}IENTS AS TNCENTTVES FOR EÀRLY
RETIREI{ENT I4UST INCI,UDE THESE DISTRTBUTIONS ÀS TNCOME FOR
NEBRÀSKÀ INDIVIDUAÍ, INCOI{E TAX PURPOSES.

Àdvice has been requested whether IumP sum raiÌroad
made as incentives for early retirement are
distributions
taxable as income for Nebraska purposes j.n the year of payment.
payments received under a lump sum railroad distribution as an
incentive for early retirement must be included in federal gross
income for Nebraska tax purposes for the following reasonss
pursuant to Internal Revenue ServÍce policy determínation
regarding lump sum railroad distributions in issue, such lump
sum distributions are considered "severance or termination pay"
and are subJect to taxat,ion as compensation included within
federal gross income amounts. Since the starting point fof
computing Nebraska individual taxable income is the federal
adjusted gross income, the lump sum distributions in issue are
to be used for Nebraska pur?oses. Further, these pa)rments are
not considered distributions as part of the Railroad Retirement
Accordingly, they cannot, be claimed as a Nebraska
Act.
adjustment.

Since the lump sum railroad distributions are compensation for
federal income- determinations, these amounts are reflected in
Nebraska individual income tax calculations.
APPROVED:

,4,¿^
Q¿"22
John Û1. Boehm

State Tax Commissioner
september /7r4, 1988

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