Montana Retirement Income Tax: 2026 Senior Guide

Montana taxes your Social Security benefit to the same extent the federal government does. It also generally taxes pensions, IRA withdrawals, and 401(k) distributions that are federally taxable, and after its 2024 reform the main break left is an age-65 subtraction set at $5,660 per qualifying taxpayer for tax year 2025. The Montana retirement income tax runs at two rates, 4.7% and 5.9%.1 Three narrower exceptions exist. Railroad retirement benefits are subtracted where federal law exempts them from state taxation. A person receiving military survivor benefits may subtract up to 50 percent of that income, and a retired service member with Montana wage, business, or farm income may subtract part of a military pension, both subject to residency conditions and a 5-consecutive-year limit.1

This guide explains exactly what Montana taxes, the senior subtraction, the railroad and military breaks, and what the two-rate system means for care withdrawals.

Montana Retirement Income Tax at a Glance

Here is how Montana handles each common source of retirement money.

Two more situations round out the picture for retirees: raising care money by selling a home or investments (capital gains) and moving into or out of Montana partway through a year. Both are covered in the paying-for-care section below.

Social Security is taxable in Montana, to the same extent your benefit is included in your federal taxable income.1 So the portion the IRS taxes is also taxed by Montana, and the portion the IRS leaves out stays out of your Montana taxable income too.

Pension, IRA, and 401(k) income that is federally taxable is generally taxable in Montana as well.1 Railroad retirement benefits are the exception: Montana subtracts them where federal law exempts them from state taxation.1 The other relief is a subtraction tied to your age, plus two conditional subtractions for military retirement income and military survivor benefits. All are explained below.

Montana Retirement Income Tax: How It Works

Montana uses a two-rate income tax, 4.7% on lower income and 5.9% on higher income, effective with its 2024 reform. For tax year 2025, a single or married-filing-separately filer pays 4.7% on the first $21,100 of Montana ordinary income and 5.9% above that.1 Retirement income is taxed under that same structure, with no special low rate for retirees.

The headline for retirees is that Montana taxes Social Security.1 Be straight about this if you are comparing states: a retiree living mostly on Social Security will owe Montana tax on the same part of the benefit the federal government taxes, and the $5,660 age-65 subtraction is the main retirement-specific break left to offset it.1 Check the state you are comparing against on its own revenue department's site rather than assuming it works the same way.

The Age-65 Subtraction, Now $5,660

After Montana's 2024 tax reform, the main retirement-related break is an additional subtraction for a taxpayer who has reached 65. The statute sets it at $5,500 per qualifying taxpayer ($11,000 for joint filers who are both 65 or older) and requires an annual inflation adjustment beginning with tax year 2025, which set the figure at $5,660 per qualifying taxpayer.1 Subtracting it lowers the income exposed to the 4.7% and 5.9% rates.

Because the amount is indexed, use the figure for the year you are filing rather than the number printed in the code. The Montana Department of Revenue publishes it each year.

This replaced older, more generous provisions. The partial pension, annuity and IRA deduction was repealed by the reform, effective for tax year 2024.1 So a retiree who once leaned on that deduction now has the age-based subtraction instead.

The subtraction is tied to age, not to the source of the income. A 70-year-old with a pension and a 70-year-old with only 401(k) withdrawals both get the same $5,660.1 It is a modest, even break rather than a large carve-out for any one income type.

The Two Military Subtractions

If you are a military retiree or a surviving spouse living on military survivor benefits, do not assume the whole payment is taxable in Montana. Two subtractions are available, and they work differently:

• Military survivor benefits. A person who receives military survivor benefits may subtract up to 50 percent of that income from Montana taxable income.1
• Military pension or retirement income. A retired service member may subtract the lesser of two amounts: the Montana source wage income on the return (wages, business income, or farm income earned in the state) or 50 percent of the military retirement income.1 So this one helps a retiree who is still earning in Montana, and it is capped by those earnings.

Neither is unconditional. The same limits in MCA 15-30-2120(9) apply to both, and they decide whether either is worth anything to you:

• Residency. You must either have become a Montana resident on or after June 30, 2023, or have been a Montana resident before receiving the military pension or retirement income and remained one after receiving it.1
• A 5-year limit. Each subtraction may be claimed for only 5 consecutive years after that residency condition is met.1
• No return trip. Neither is available if you claimed the exemption before becoming a nonresident.1

Confirm your own residency dates and your remaining years with the Montana Department of Revenue or a preparer, because the 5-year clock is worth timing deliberately.

Railroad Retirement Benefits

Railroad retirement is the other exception to the rule that federally taxable pension income is taxable in Montana. The state subtracts railroad retirement benefits where federal law exempts them from state taxation.1 If part of your income is a railroad retirement benefit, ask a preparer how that subtraction applies to your return.

Social Security Follows the Federal Treatment

Montana does not tax all of your Social Security automatically. It taxes the benefit to the same extent it is included in your federal taxable income.1 Under federal rules, lower-income retirees include little or none of their benefit in taxable income, while higher-income retirees include a large share of it.

So the practical sting depends on your total income. A retiree whose federal return includes none of their Social Security owes Montana nothing on it either.1 A higher-income retiree who includes most of their benefits federally is taxed by Montana on that same share. The state simply rides the federal calculation.

What This Means for Paying for Care

If you are drawing on retirement savings to pay for senior care, Montana taxes those withdrawals, and large ones can also pull more of your Social Security into the taxable column.

A 401(k) or IRA withdrawal to cover assisted living is taxed under the 4.7% and 5.9% rates.1 Worse, a big withdrawal raises your federal taxable income, which can push more of your Social Security into the taxed portion, since Montana follows that federal figure. So the withdrawal can be taxed twice over in effect, once directly and once by exposing more of your benefit.

To put an illustrative number on it: a hypothetical $40,000 IRA withdrawal taxed near the top 5.9% rate carries a direct Montana tax of about $2,360, before counting any extra Social Security it drags into the taxable band.1 Spreading withdrawals across years can keep more of your benefit untaxed.

The federal side compounds this. A large withdrawal raises your federal tax and can lift your Medicare premiums two years out, on top of the Montana effects. So planning the timing and size of care withdrawals matters more here than in states that ignore Social Security.

For the federal mechanics, including the early-withdrawal penalty and required distributions, see our guide to using retirement accounts for care. To sequence your income sources sensibly, see building a senior care funding plan. If you are just starting to map the money, begin with how to pay for senior care.

A tax professional can run your full picture, state and federal, before you withdraw large sums.

Selling a Home or Investments to Pay for Care

Some families raise care money by selling the family home or appreciated investments, which can create a capital gain. Montana computes its taxable income starting from federal taxable income, so a gain that is part of your federal taxable income is part of Montana's starting figure too. Its 4.7% and 5.9% rates are stated for ordinary income, so ask the Montana Department of Revenue how a long-term gain is taxed before you sell.1

On the sale of a primary home, a federal exclusion can soften the hit first. Under Section 121 of the federal tax code (26 U.S.C. 121), you can exclude up to $250,000 of gain if, during the 5 years ending on the sale date, you owned and used the home as your principal residence for periods adding up to 2 years or more. The exclusion can be taken only once during a 2-year period.2

For a married couple filing jointly, IRS Publication 523 says the exclusion rises to $500,000, but Section 121 attaches three conditions: either spouse meets the ownership requirement, both spouses meet the use requirement, and neither is barred by the once-in-2-years rule. If you do not meet them, the limit is the sum of the limits each spouse would have had if unmarried.2

A separate rule covers someone who moves into care. A taxpayer who becomes physically or mentally incapable of self-care, and who owned the property and used it as a principal residence for periods adding up to at least 1 year of the 5-year period, is treated as using it as a principal residence for any time in that period when they still own it and live in a facility licensed by a state or political subdivision to care for someone in that condition, a nursing home included. IRS Publication 523 says time spent living in such a care facility counts toward the 2-year residence requirement.2 If you do not meet the ownership and use requirements, or are barred by the once-in-2-years rule, but you sell by reason of a change in place of employment, health, or, to the extent regulations provide, unforeseen circumstances, a partial exclusion applies: the dollar limit is scaled to the shorter of the time you owned and used the home as your principal residence in the 5 years before the sale, or the time since your last sale that used the exclusion, measured against 2 years.2 If the gain is more than the exclusion, or you qualify only for a partial exclusion, some of the gain may be taxable.2 And if you were entitled to depreciation deductions because you used part of the home for business or as rental property, Publication 523 says you cannot exclude the part of the gain equal to any depreciation allowed or allowable for periods after May 6, 1997.2 Selling or renting the home to pay for care walks through the Medicaid and SSI side of the same decision.

If You Move Into or Out of Montana

A senior who relocates to be near family or a care facility should check how Montana taxes the year of the move before filing. Ask the Montana Department of Revenue which return and schedule apply to you, and consider a tax professional for the transition year.

Where Montana Stands for Retirees

Montana reaches nearly every common source of retirement money, starting with Social Security.1 A Social-Security-reliant retiree owes Montana tax on the portion of the benefit the federal government already taxes.

The 2024 reform did not help retirees much. It repealed the partial pension, annuity and IRA deduction and left the age-based subtraction, $5,660 for tax year 2025, in its place.1 For a retiree who relied on that deduction, it is a smaller break than before. The narrower exceptions are the railroad retirement subtraction and the two military subtractions, each with its own conditions.1

The rates themselves are not the main issue. The two-rate system runs 4.7% on lower income and 5.9% on higher income, with no special retiree rate.1 The deciding factor for most retirees is the Social Security treatment, not the rate.

The takeaway: Montana taxes Social Security and generally taxes federally taxable pensions, IRA withdrawals, and 401(k) distributions. If a large share of your income is Social Security, plan care withdrawals carefully so they do not drag more of your benefit into the taxable band. And if part of your income is railroad retirement, a military pension, or a military survivor benefit, check the matching subtraction and its conditions before you assume the whole payment is taxable.1

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The information on Brevy.com is for educational purposes only and is not a substitute for professional legal, financial, or medical advice. Rules vary by state and program and change frequently. Always verify with the relevant agency or a qualified professional. Brevy is not a law firm, financial advisor, or healthcare provider.