Simplification of Montana Income Taxation

November 29, 2021

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2021 Legislative Roundup

The 67th Montana Legislature made several changes to Montana’s tax laws. To help you sort out the changes, we have created a series explaining the new laws called the 2021 Legislative Roundup.

This article is a part of our 2021 Legislative Roundup series.

Senate Bill 399: Simplification of Montana Income Taxation

Senate Bill 399, passed during the 67th Montana Legislative Session, made several changes to Montana’s income tax system. Some changes go into effect in Tax Year 2022, which we detailed in an earlier Tax News You Can Use article. However, most changes take place in tax year 2024.

This is a high-level summary of what taxpayers and preparers can expect beginning in Tax Year 2024 for individual income tax filers.  

Senate Bill 399 will align the Montana tax system more closely to the federal tax system. Beginning in Tax Year 2024, Montana taxable income will be calculated starting with federal taxable income. This will enable taxpayers to consider the federal adjustments and the federal standard or itemized deductions they used when calculating their federal taxable income. While taxpayers will use the federal taxable income to calculate Montana taxable income, any Qualified Business Income Deduction claimed on the federal return must be added back to Montana taxable income.

The bill created two new subtractions. First, taxpayers over the age of 65 may subtract $5,500 from Montana taxable income. Second, thirty percent of a taxpayer’s Montana source net-long term capital gain may be subtracted from Montana taxable income. As a result of these changes, the interest exemption and partial pension, annuity, and IRA income exemption for taxpayers over the age of 65 will be repealed, as well as the capital gains tax credit.

In addition to the repeal of the interest exemption and partial pension, annuity, and IRA income exemption, several other subtractions will be repealed, including:

  • Montana Medical Savings Account contributions (earnings from contributions made before January 1, 2024, can still be subtracted)
  • Montana First-time Homebuyer Account contributions made after January 1, 2024 (contributions and earnings from contributions made before January 1, 2024, can still be subtracted)
  • Farm and Ranch Risk Management Account contributions
  • Income of a child taxed to parent
  • Unemployment
  • Tips for certain service industry workers
  • Workers’ compensation
  • Health insurance premiums taxed to an employee
  • Student loan repayments for health care professionals and qualified educators
  • Partial retirement disability income

Estates and trusts are subject to the new rates; they must also add back any Qualified Business Income Deduction to Montana taxable income. They are eligible for the 30% net-long term capital gain subtraction.

Lastly, Montana taxpayers will see a reduction in the number of tax brackets and a decrease in the tax rate. The brackets will decrease from seven to two and the new rates will be 4.7% and 6.5%. Taxpayers will use the federal filing status to determine their tax rate, much like how tax is calculated federally.