Montana Retirement Income Tax: 2026 Senior Guide

Montana is one of the few states that taxes Social Security. It also taxes pensions, IRA withdrawals, and 401(k) distributions, and after its 2024 reform the main break left is a $5,500 subtraction for anyone 65 or older. The Montana retirement income tax runs at two rates, 4.7% and 5.9%.1

This guide explains exactly what Montana taxes, the limited senior subtraction, 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, which sets the state apart from most. Montana taxes your benefit to the same extent it is included in your federal taxable income.1 So the portion the IRS taxes is also taxed by Montana.

Pensions, IRA withdrawals, and 401(k) distributions are all taxed as well.1 The relief that remains is a single flat subtraction tied to your age, which we explain next.

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.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. It is one of the few states that does.1 Be straight about this if you are comparing states: a retiree relying heavily on Social Security will owe Montana tax on the part the federal government taxes, where most states tax none of it.

The $5,500 Subtraction for Those 65 and Older

After Montana's 2024 tax reform, the main retirement-related break is a $5,500 subtraction for taxpayers 65 and older.1 If you are 65 or older, you can subtract up to $5,500 from your taxable income, which lowers the income exposed to the 4.7% and 5.9% rates.

This replaced older, more generous provisions. The earlier pension and annuity exclusions were repealed in the 2024 reform.1 So a retiree who once leaned on a pension exclusion now has the flat $5,500 age-based subtraction instead.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 $5,500.1 It is a modest, even break rather than a large carve-out for any one income type.

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 creates a capital gain. Montana taxes capital gains as part of income and applies its own treatment to long-term gains, so confirm the current capital gains rate with the Montana Department of Revenue before you sell.

On the sale of a primary home, a federal exclusion usually softens the hit first. Under Internal Revenue Code (IRC) Section 121, you can exclude up to $250,000 of gain, or $500,000 for a married couple filing jointly, if you owned and used the home as your main home for at least 2 of the 5 years before the sale.2 A senior who moves into assisted living before meeting the full 2-year test can still claim a reduced, prorated exclusion. Only the gain left after that federal exclusion is exposed to Montana tax.

If You Move Into or Out of Montana

A senior who relocates to be near family or a care facility does not owe Montana a full year of tax on a partial year of residency. Montana treats you as a part-year resident: it taxes the income you receive while you are a Montana resident, plus any Montana-source income, and prorates the year of the move on the part-year resident schedule of Montana Form 2. File that return with the Montana Department of Revenue, and consider a tax professional for the transition year, since the split can affect how much of your retirement income Montana reaches.

Where Montana Stands for Retirees

Montana is on the less friendly end for retirees, mainly because it taxes Social Security.1 Most states exempt the benefit entirely, so a Social-Security-reliant retiree pays more in Montana than in most of the country.

The 2024 reform did not help retirees much. It repealed the older pension and annuity exclusions and left a flat $5,500 age-based subtraction in their place.1 For a retiree who relied on a pension exclusion, that is a smaller break than before.

The rates themselves are moderate. The two-rate system of 4.7% and 5.9% is in the middle of the national range, neither a bargain nor punishing.1 The deciding factor for most retirees is the Social Security treatment, not the rate.

The takeaway: Montana taxes the income sources most other states protect. If a large share of your income is Social Security, expect to owe more here than elsewhere, and plan care withdrawals carefully so they do not drag more of your benefit into the taxable band.

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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.