Does Montana Have an Individual Income Tax?

Montana has a state individual income tax. The tax is calculated based on a taxpayer’s income, filing status, and residency, with specific rules determining who must file a return. Recent legislative changes have simplified Montana’s tax code, moving from a multi-bracket system to a more streamlined approach. These updates also affect how deductions are handled, aligning certain aspects more closely with federal tax regulations.

Montana Income Tax Rates and Brackets

Montana’s individual income tax system is progressive and was recently simplified into two tax rates: 4.7% and 5.9%. The specific income levels for these brackets depend on the taxpayer’s filing status.

For single filers and those married filing separately, taxable income up to $21,100 is taxed at the 4.7% rate, with any income exceeding that amount taxed at 5.9%. For married couples filing a joint return, the 4.7% rate applies to taxable income up to $42,200, with income above that level taxed at 5.9%. Head of household filers pay the 4.7% rate on taxable income up to $31,700 and 5.9% on income above that threshold.

A recent change is that Montana no longer offers a state-specific standard deduction or personal exemptions. The calculation of Montana taxable income now begins with federal taxable income. This means the standard deduction amounts claimed on a federal return, which vary by filing status, age, and whether the taxpayer or their spouse is blind, are the basis for determining taxable income at the state level.

Determining Who Must Pay

The requirement to file a Montana income tax return depends on a person’s residency status and the source of their income. Montana defines three categories of taxpayers: full-year residents, part-year residents, and non-residents. A full-year resident is someone who lived in Montana for the entire tax year or considers it their permanent home, and these individuals are taxed on all income they earn, regardless of where it was earned.

Part-year residents are individuals who either established residency in Montana or moved out of the state during the tax year. They are taxed on all income earned while they were a resident of Montana, plus any income derived from Montana sources during the period they were a non-resident.

A non-resident is someone who lived outside Montana for the entire year but earned income from within the state. Non-residents are required to pay Montana income tax on their “Montana-source income.” This includes wages for services performed in Montana, income from a business operating in the state, and rental income from a Montana property. If a non-resident’s income from Montana sources meets the federal filing threshold, they must file a Montana return.

Taxable and Non-Taxable Income

Montana’s tax base starts with federal taxable income, meaning most income sources taxable at the federal level are also taxed by the state. This includes common income types such as wages, salaries, tips, business profits, and investment earnings. Following recent changes, unemployment compensation is now included in taxable income.

The state provides specific rules for the taxation of retirement income. Distributions from pensions and retirement accounts like 401(k)s and IRAs are taxable, but Montana offers a subtraction for older taxpayers. Individuals aged 65 and over can subtract a certain amount from their federal taxable income, which is adjusted annually for inflation. For a married couple where both spouses are 65 or older, this subtraction can be claimed by each spouse if filing jointly.

Social Security benefits are also subject to state tax, but the taxable amount depends on the taxpayer’s income. For single filers with an adjusted gross income (AGI) under $25,000, or joint filers with an AGI under $32,000, all Social Security income is deductible. For those with income above these thresholds, a portion of their benefits becomes taxable. Other non-taxable income in Montana includes active-duty military pay and interest from federal bonds.

Available Tax Credits

Tax credits provide a dollar-for-dollar reduction of the tax owed, which is different from a deduction that only lowers the amount of income subject to tax. Montana offers several tax credits aimed at specific groups of taxpayers or to encourage certain activities.

The Elderly Homeowner/Renter Credit can provide a refundable credit of up to $1,150. To qualify, a taxpayer must be 62 or older, have lived in Montana for at least nine months of the year, occupied a residence in the state for at least six months, and have a total household income of less than $45,000. This credit is available even to those who are not required to file an income tax return.

A credit is available for individuals who make contributions to qualified Montana endowments. This nonrefundable credit encourages charitable giving by allowing a taxpayer to claim a credit of 40% of their donation’s value, up to a maximum credit of $15,000 for individuals. Other credits exist for contributions to student scholarship organizations and for college savings plans.