Final answer:
The correct answer is: B. Railroad retirement benefits, both Tier 1 and Tier 2, are not taxable by California. Both types of benefits receive favorable tax treatment and are exempt from state income tax, aligning with how social security benefits are treated at the state level.
Step-by-step explanation:
In terms of tax treatment for railroad retirement benefits in California, both Tier 1 and Tier 2 benefits are excluded from state income tax. Tier 1 railroad retirement benefits are equivalent to social security benefits and are treated similarly for tax purposes. Just as social security benefits are not taxed by California, Tier 1 benefits are also not taxable. Tier 2 benefits, which are akin to private pension benefits, are also not taxable by the state of California, even though they might be subject to federal taxation.
This tax treatment is especially beneficial for retirees since it reduces their taxable income at the state level. However, beneficiaries are always advised to check for updates in state tax laws and consult with a tax professional for confirmation of their specific situations.