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Category: Montana

Montana Subtractions from Income

Exempt Interest and Dividends from Federal Bonds, Notes, and Obligations

If you received interest on United States government obligations and mutual fund dividends attributable to that interest, you can subtract these amounts from your federal adjusted gross income as long as they are included in your federal adjusted gross income for Form 2. In addition, if you received interest on obligations from U.S. territory or government agency obligations that are specifically exempt by federal law or any mutual fund dividends attributable to this interest, you can subtract these amounts from your federal adjusted gross income as long as they are included in your federal adjusted gross income on Form 2.

Interest on obligations that are only guaranteed by the United States government is not tax exempt. If you received interest or mutual fund dividends attributable to Governmental National Mortgage Association (Ginnie Mae) bonds, or Federal Home Loan Mortgage Corporation (FHLMAC) securities, you cannot subtract this interest or mutual fund dividends.

United States obligations that are exempt include:

  • Series E, EE, F, G and H savings bonds
  • U.S. treasury bills
  • U.S. government notes
  • U.S. government certificates

Partial Pension and Annuity (Retirement) Income Exemption and Railroad Retirement Income

If you have reported taxable retirement income, you may be entitled to a partial exemption of this income.
Before you determine if any of this retirement income is excluded, you should first find out if any of this income is from Tier II Railroad Retirement benefits. If so, your Tier II benefits are 100% exempt from Montana taxation. You should exclude your entire taxable Tier II Railroad Retirement benefits. Any remaining amount of pension and annuity income is then used to determine the partial pension and annuity income exemption.

Premature distributions and early withdrawals of your retirement income do not qualify for the retirement income exclusion. Early distributions which required payment of the federal 5% or 10% additional tax do not qualify for this exemption. Also, if you have received a disability pension, which is identified as a distribution code 3 on your federal Form 1099-R, you should use Montana Form DS-1, 2013 Disability Income Exemption, to determine your deduction instead of the retirement income exclusion. If you have received retirement income other than Tier II Railroad Retirement benefits or premature distributing and early withdrawals, you should complete Worksheet IV to determine the amount of your exemption.

Your retirement exemption is limited to the lesser of your taxable retirement income that you have received or $3,900, as long as your federal adjusted gross income is $32,480 or less and you are filing as a single taxpayer, filing jointly with your spouse and only one of you has taxable retirement income, or filing as head of household. If you are filing jointly with your spouse , both of you have retirement income, and your federal adjusted gross income is $32,480 or less, you both can exclude the lesser of your taxable retirement income that you receive personally, or $3,900 each for a maximum of $7,800.

If both you and your spouse have received retirement income and you are filing ling your income tax return separately on the same form or on separate forms, the lesser of your retirement income or $3,900 applies separately to both spouses as long as your separately stated federal adjusted gross income is $32,480 or less. When your federal adjusted gross income exceeds $32,480, your retirement exemption is reduced $2 for every $1 that your federal adjusted gross income is over $32,480.

Medical Care Savings Account(MSA) Deposits and Earnings

To determine your Montana adjusted gross income, you can subtract from your federal adjusted gross income the amounts that you deposited into a Montana medical care savings account. Please do not confuse this Montana MSA with the federal health savings account (HSA) that is deductible on Form 2, line 26. You are allowed to participate in both programs.

Your Montana medical care savings account provides you with the opportunity to exclude from your Montana adjusted gross income up to $3,000 of contributions plus interest or other earnings on these funds annually. If you are married filing jointly with your spouse or married filing separately with your spouse, both of you can qualify for your own Montana MSA and you each can exclude up to $3,000 plus interest or other earnings on this account annually. To qualify for this exclusion, you will need to establish a separate account that is owned by you alone and is not jointly held with your spouse or any other individuals. In addition, you cannot commingle other funds with this account. Once these funds are excluded from Montana adjusted gross income, they can be withdrawn only for the payment of qualified medical expenses for you, your spouse or your dependent. Any of these funds withdrawn for other purposes are subject to tax in the year that they are withdrawn and they also may be subject to a 10% penalty if they are withdrawn on any day other than the last business day of the year.

For additional information/instructions on the Montana Medical Care Savings Account, see Montana Form MSA.

Exempt First-Time Home Buyer Savings Account Deposits and Earnings

To determine your Montana adjusted gross income, you can subtract from your federal adjusted gross income the amounts you deposited into a Montana first-time home buyer savings account. Your Montana first-time home buyer savings account provides you with the opportunity to exclude from your Montana adjusted gross income up to $3,000 of contributions plus interest or other earnings on these funds annually.

If you are married filing jointly with your spouse or married filing separately with your spouse, both of you can qualify for your own Montana first-time home buyer savings account and you each can exclude up to $3,000 of contributions plus interest or other earnings on this principal annually. To qualify for this exclusion, you will need to establish a separate or joint account with your spouse and contribute to your account(s) prior to purchasing your first-time home. If you file your income tax return separately with your spouse and if you have established a joint first-time home buyer savings account with your spouse, you cannot take this exclusion. Therefore, the state recommends that you and your spouse establish separate first-time home buyer savings accounts instead of a jointly held account. These separate accounts will qualify both of you for the $3,000 annual exclusion whether you file jointly or separately with your spouse.

Once these funds are excluded from Montana adjusted gross income, they can be withdrawn only for the down payment and allowable closing costs for purchasing your single-family residence in Montana. Examples of eligible expenses include down payment, closing costs, realtor’s fees, appraisal costs, credit history report, points, prorated property taxes and loan origination fees. If you withdraw any of these funds for other purposes, they are subject to tax in the year that they are withdrawn and they also may be subject to a 10% penalty if they are withdrawn on any day other than the last business day of the year.

For additional information, please refer to Montana Form FTB.

Exempt Farm and Ranch Risk Management Account Deposits

When you determine your Montana adjusted gross income, you can subtract from your federal adjusted gross income the lesser of 20% of the net income that is attributable to your agricultural business or $20,000. This account is designed to be used as a risk management tool for your individual or family farm corporation’s agricultural business. It is established as a Montana trust with your financial institution as the trustee.

Amounts that you contributed to your farm and ranch risk management account that were excluded from your Montana adjusted gross income in prior years are taxable to you and should be included in your Montana adjusted gross income when you distribute your funds. Amounts that you contributed to your farm and ranch risk management account that are not distributed before the last business day on the fifth year from the date that this contribution was deposited are considered distributed and are assessed a 10% penalty on the amount of tax resulting from the farm and ranch risk management account principal. For further instructions about the Montana farm and ranch risk management account, see Montana Form FRM. When you claim this exclusion, you will need to attach a copy of Montana Form FRM to your income tax return.

Other Subtractions

Enter any other subtractions to federal adjusted gross income. For example, if you were the owner of a mobile home park residents' association, a 501(c)(3) organization or a county or municipal housing authority, you may be able to exclude all or a portion of the gain you recognized. Or if you received a death benefit payment from the Montana Department of Military Affairs because you are the survivor of a member of the National Guard who died while on state active duty orders that is included in your federal adjusted gross income, that amount is exempt from state taxes in Montana.

Exempt Workers’ Compensation Benefits

Benefits received under the workers’ compensation laws are not taxed by Montana. If you reported taxable workers’ compensation benefits in your federal adjusted gross income, enter the amount of these benefits on this line.

Exempt Military Salary of Residents on Active Duty

If you are a Montana resident receiving military compensation and if this compensation is included in your federal adjusted gross income, you can subtract from your federal adjusted gross income your basic, special and incentive pay that you receive from:

  • serving on active duty as a member of the regular armed forces,
  • being a member of a reserve component of the armed forces or as a member of the National Guard serving on active duty in a contingent operation as it is defined in 10 USC 101, and
  • being a member of the National Guard and assigned to active service authorized by the President of the United States or the Secretary of Defense for a period of more than 30 consecutive days for the purpose of responding to a national emergency declared by the president and supported by federal funds.

Military compensation that you have received from the following activities cannot be subtracted from your federal adjusted gross income:

  • Salaries that you have received for annual training and weekend duty,
  • Salaries that you have received for being a member of a reserve component of the armed forces that is not received under 10 USC 101,
  • Salaries that you received for performing full-time National Guard duty under Title 32 of the United States Code ( for example, Active Guard and Reserve, Active Duty for Operational Support, or Active Duty for Counter Drug that is not received under 10 USC 101), and
  • Income you have received from retirement, retainer, equivalent pay or allowances

Note: When you claim this exemption, you will need to attach verification of your military status (such as your military orders) to your income tax return.

Exempt Income of Nonresident Military Servicepersons

If you are a nonresident of Montana, living in Montana solely by reason of compliance with your military orders, you are not required to establish residency in Montana and your military compensation is not considered Montana source income and is not taxable to Montana. On this line, you should subtract the military compensation that you included in your federal adjusted gross income on Form 2, line 7.

If you have received any other income that is considered Montana source income (such as wages for services performed in Montana or Montana business income), this income is taxable. You should complete a nonresident Montana income tax return and report both your Montana source and non-Montana source income and then prorate your Montana tax liability on Form 2, Schedule IV.

If you are the nonresident spouse of a nonresident military serviceperson and are in Montana solely to be with your military spouse who is serving in compliance with military orders, you may be covered under the Military Spouse Residency Relief Act and your compensation for personal services in Montana may be taxable by your home state.

Exemption for Certain Taxed Tips and Gratuities

You can subtract from your federal adjusted gross income any tips and gratuities that you have received from patrons while you worked in the food, beverage or lodging industry that you reported as part of your federal adjusted gross income. All other tips and gratuities that you received for providing services in other business industries—such as hair stylists, paper carriers and river guides—are not excluded from your federal adjusted gross income in arriving at your Montana adjusted gross income.

Exemption for Certain Income of Your Child Taxed to the Parents

If your federal adjusted gross income included unearned income of a dependent child as determined on federal Form 8814, you may be able to exclude the unearned income from your Montana adjusted gross income. You can exclude the unearned income from your adjusted gross income if your child’s gross income does not exceed $4,010 or they file their own Montana income tax return.

Passive Loss Carryover Exclusion Adjustment

Prior to tax year 2007, married taxpayers who filed a joint federal return, but filed separate Montana returns, were required to recompute the amount of allowable passive loss. This may have resulted in a larger passive loss carryover for state purposes. Beginning with the 2007 tax year, married taxpayers filing separate Montana returns are allowed to claim the same amount of passive loss allowed using the federal rules for a married couple filing a joint return. If you have state passive loss carryover from tax year 2006 or earlier that you can now use under the federal rules, report the adjustment on this line.

Montana Net Operating Loss Carryover

The Montana net operating loss carryover may be different from the amount of your federal net operating loss carryover. You should record the amount of the federal net operating loss carryover. Enter the amount of the Montana net operating loss carryover from Montana Form NOL. If you are carrying forward a net operating loss that occurred prior to January 1, 1999, use Montana Form NOL-Pre-99 to determine your carryover amount.

Form DS-1 Disability Income Exemption

You can qualify for a partial retirement disability income exclusion of up to $5,200 if you are:

  1. are a Montana resident,
  2. are under the age of 65,
  3. you retired as permanently and totally disabled, and
  4. not treating your disability income as a pension or annuity.

You are permanently and totally disabled if you are unable to engage in any substantial gainful activity, if you have been medically determined to be physically or mentally impaired, and if your condition is expected to last at least 12 months. Your disability income is generally reported with a distribution code 3 on the federal Form 1099-R. If you qualify for this exclusion, you should complete Montana Form DS-1 in order to determine the amount of your exclusion.