Does Montana Tax Pensions?

Income taxpayers who live full time in the state of Montana and earn income from pension plans may be required to pay taxes on all pension earnings if their federal adjusted gross incomes (AGI) exceed state limits. However, the state offers a partial exemption to qualifying taxpayers in lower income brackets. In addition, the state fully exempts pension income received from tier II benefits of the Railroad Retirement plan.

Figuring Tax

Montana taxpayers use Schedule II of the individual income tax form to report subtractions from federal adjusted income for state taxation purposes. The taxpayer completes a worksheet to figure out if part of the pension income is taxable. On the worksheet, taxpayers enter single or joint income, whichever applies, and calculate the partial pension and annuity exemption based on the amount of gross income reported on federal income tax returns.

Example

For the 2010 tax year, the state increased the exemption and income limits to compensate for inflation. Montana taxpayers in 2011, filing income taxes for the prior year, were allowed an exemption of $3,640 if federal AGI did not exceed $30,320. Montana taxpayers with a federal AGI between $30,320 and $32,140 could claim a reduced exemption for the 2010 tax year. According to the state's tax guidelines, once a taxpayer earns more than $30,320, the pension exemption is "reduced $2 for every $1 that federal AGI exceeds $30,320." Using these calculations, the exemption was completely phased out at incomes of $32,140 or more for the 2010 tax year. This means if a Montana resident's income exceeds the federal AGI limit, pension income is fully taxable unless it is received from Railroad Retirement.

Railroad Retirement Benefits

Similar to a social security program, the federal railroad pension is funded from taxes paid into the program by railroad workers and employers. Montana imposes no state income tax on pension income received from tier II benefits of the Railroad Retirement system because, under federal law, pension income from the fund is tax-exempt in all states.

Nonresidents

Regulations differ for nonresidents who must file a Montana state income tax return and for taxpayers who live in the state a fraction of the year. For example, nonresidents who earn pension income not categorized as "Montana source income" do not pay taxes on earnings from a pension plan. Part-year residents pay taxes on a proportional basis relative to the percentage of the year they live in the state.

References

• Montana Department of Revenue: Montana Individual Income Tax Form Booklet (Long Form)
• Montana Department of Revenue: Qualified Capital Gain Exclusion and Partial Pension and Annuity Income Exclusion
• Social Security Administration: Social Security Programs in the United States - Railroad Retirement
• United States Railroad Retirement Board: Federal Income Tax and Railroad Retirement Benefits