This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

(1) "Part-year resident" means an individual who either was a Montana resident at the start of the year that established residency in another state during the year, or who was a nonresident at the start of the year that established residency in Montana during the year. The term does not include individuals such as:

(a) retirees, commonly referred to as "snowbirds," who are residents of Montana but live in another state for a portion of each year;

(b) a resident of another state who works in Montana on a seasonal basis, but does not establish residency in Montana; or

(c) a Montana resident attending an out-of-state college who has not established residency elsewhere.

(2) "Permanent place of abode" means a dwelling place habitually used by an individual as the individual's home, whether or not owned by the individual or a dwelling the individual may someday leave.

(1) A person required to file a Montana Individual Income Tax Return must determine Montana income tax liability as provided by the applicable Montana statutes and rules. The rules for determining if an individual, whether resident for a full or part tax year, or a nonresident, must file a Montana Individual Income Tax Return, are located in ARM Title 42, chapter 15, subchapter 3. Special rules, located in ARM Title 42, chapter 15, subchapter 1, apply to certain wages of nonresident military servicepersons and enrolled tribal members.

(2) All income except income specifically exempted in Title 15, chapter 30, MCA, or these rules is included in determining income subject to Montana income tax.

(3) The starting point for computing Montana individual income tax liability is usually adjusted gross income as determined for federal income tax purposes. If a taxpayer is not required to, or does not, file a federal income tax return for a tax year for which the taxpayer is required to file a Montana individual income tax return, the taxpayer shall compute federal adjusted gross income and complete the applicable federal schedules. The federal computations and tax schedules required by this rule are tax records the taxpayer must retain and provide the department on request.

(4) Federal adjusted gross income is adjusted for Montana additions and subtractions to arrive at Montana adjusted gross income. The subtractions reduce the amount of income subject to tax for all taxpayers, whether they claim the Montana standard deduction or itemized deductions.

(5) The additions for which additional rules are provided include:

(a) an S corporation shareholder's share of federal income tax paid by the S corporation located in ARM Title 42, chapter 9, subchapter 4;

(b) unqualified withdrawals from medical savings accounts located in ARM Title 42, chapter 15, subchapter 6; and

(c) unqualified withdrawals from first-time home buyer accounts located in ARM Title 42, chapter 15, subchapter 9.

(6) Unless otherwise specified below, rules that address subtractions are found in ARM Title 42, chapter 15, subchapter 2. The subtractions for which additional rules are provided include:

(a) certain military salary of resident servicepersons;

(b) certain interest income of taxpayers 65 and older;

(c) interest on federal obligations, and mutual fund dividends attributable to interest on federal obligations;

(d) certain disability income;

(e) certain capital gain income realized on or before December 31, 1986, that is being recognized on the installment reporting method;

(f) certain pension and annuity income;

(g) certain income of enrolled tribal members;

(h) certain income of a dependent child included in a parent's federal adjusted gross income;

(i) certain taxed social security benefits;

(j) certain contributions to, and earnings on, medical savings accounts, ARM Title 42, chapter 15, subchapter 6;

(k) certain contributions to and earnings on family education savings accounts, ARM Title 42, chapter 15, subchapter 8;

(l) certain contributions to and earnings on first-time home buyer savings accounts, ARM Title 42, chapter 15, subchapter 9; and

(m) dividends and capital gains realized from investment in certain small business investment companies, ARM Title 42, chapter 15, subchapter 2 and chapter 23, subchapter 1.

(7) After Montana adjusted gross income is determined, a taxpayer is allowed the standard deduction unless the taxpayer claims itemized deductions. The standard deduction is addressed in ARM Title 42, chapter 15, subchapter 5.

(8) Unless otherwise specified below, rules that address itemized deductions are found in ARM Title 42, chapter 15, subchapter 5. As provided in 15-30-2133, MCA, deductions for expenses associated with the excluded income described in (6) are not allowed. Additional rules related to itemized deductions include:

(a) a rule describing the calculation of itemized deductions that are limited to a percent of Montana adjusted gross income;

(b) a rule describing how certain itemized deductions must be computed when a married taxpayer filing a joint federal income tax return files a separate Montana return; and

(c) a rule describing calculation of the Montana net operating loss.

(9) After income is reduced by the standard deduction or itemized deductions, it is further reduced by personal and dependent exemptions to determine Montana taxable income. The rules relating to personal and dependent exemptions are found in ARM Title 42, chapter 15, subchapter 4.

(10) The tax rates set forth in 15-30-2103, MCA, are applied to Montana taxable income. Tax brackets are adjusted annually for inflation. The Montana tax liability of a nonresident or part-year resident is determined by multiplying the calculated tax by the ratio of Montana source income to total income.

(11) Rules describing credits that may be taken against income tax liability are located in ARM Title 42, chapter 4.   

(1) As provided in 15-30-2101, MCA, an individual may be a resident for Montana individual income tax purposes if the individual is domiciled in the state or maintains a permanent place of abode in the state. Section 1-1-215, MCA, sets forth rules for determining residency, and "domiciled" is defined in ARM 42.2.304. Whether an individual is a Montana resident for Montana income tax purposes is determined in light of all facts and circumstances.

(2) A Montana resident who enters the United States armed forces does not lose that status as a Montana resident solely by reason of being absent from this state in compliance with military orders.

(3) Special rules regarding nonresident military personnel and their dependents are located at ARM 42.15.112.

(1) Part-year residents and nonresidents are subject to the same filing requirements as residents unless otherwise expressly exempted in statute.

(2) Part-year residents and nonresidents must include all Montana source income on Schedule IV of Form 2. Montana source income is defined in 15-30-2101, MCA.

(3) Part-year residents and nonresidents compute their tax liability by multiplying the ratio of their Montana source income to income from all sources by the tax determined as if they were a resident for the entire tax year. They must complete Schedule IV, Nonresident/Part-Year Resident Tax, to determine this ratio.

(4) Part-year resident and nonresident estates and trusts are subject to the same filing requirements set forth in (1) through (3) unless otherwise expressly exempted in statute.

This rule has been transferred.

(1) A nonresident member of the United States armed forces who is living in this state solely by reason of compliance with military orders does not become a Montana resident solely by reason of being present in this state in compliance with military orders and their compensation for military service is not Montana source income. Starting in 2009, some nonresident spouses who move to Montana solely to be with that nonresident serviceperson are also allowed to retain their home residence or "domicile" and, subject to certain rules and limitations described in (6), their wage and other personal services income is not Montana source income.

(2) Nonresident military servicepersons and their spouses are, except as provided in (4), subject to Montana individual income tax in the same manner and to the same extent as any other nonresident with Montana source income.

(3) As provided in 1-1-215, MCA, if a person claims a residence within Montana for any purpose, such as obtaining a resident hunting or fishing license, that location is their residence for all purposes, including Montana individual income tax, unless there is a specific statutory exception. The definition of "resident" in 87-2-102, MCA, permits certain nonresident military personnel and their dependents to obtain resident hunting, fishing, and trapping licenses without subjecting them to individual income tax liability as residents.

(4) While the Montana income tax liability of nonresidents is usually determined by calculating the tax as if they were residents then multiplying that calculation by their ratio of Montana source income to total income, the Military Family Tax Relief Act of 2003 requires states to implement special rules when the nonresident is a military serviceperson. If a nonresident serviceperson with Montana source income or their spouse is required to file a Montana individual income tax return, the exempt military income must be excluded from both the numerator and the denominator in determining the ratio of Montana source income to total income.

(5) An example of how the tax liability would be calculated is:

(a) A nonresident serviceperson and their nonresident spouse who are filing a joint return have the following income:

�

Military compensation	$	40,000
Spouse's - Montana source income	$	30,000
Interest income - Joint	$	500
Dividend income - Joint	$	1,000
Total Income	$	71,500

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(b) The exempt military compensation is a subtraction that reduces Montana adjusted gross income:

�

Gross income:	$	71,500
Less: Exempt military compensation	($	40,000)
Montana adjusted gross income	$	31,500

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(c) The Montana personal and dependent exemptions and either the standard deduction or itemized deductions are subtracted from Montana adjusted gross income to determine Montana taxable income:

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(d) The tax, determined on the taxable income, is multiplied by the ratio of Montana source income to total income from all sources except the exempt military compensation:

�

Montana source income $ 30,000

Total income from all sources except military compensation ($30,000 + 500 + 1,000) = $ 31,500

Ratio $30,000/$31,500 = .9523

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(e) If the tax determined on the taxable income were $1,000, the taxpayers' Montana tax liability would be $952, the Montana tax liability of $1,000 multiplied by .9523, the ratio of $30,000 to $31,500.

(6) Retroactive to the beginning of calendar year 2009, the Military Spouses Residency Relief Act, Public Law No. 11197 (MSRRA), enacted special rules that affect how Montana and other states tax the wage and other personal service income earned by nonmilitary spouses (for simplicity, the term "wages" will be used to describe all personal services income).

(a) If a military serviceperson and nonmilitary spouse are residents of the same state (the "home state"), when the nonmilitary spouse moves to Montana solely to be with the military spouse who is serving in Montana in compliance with military orders MSRRA allows the nonmilitary spouse to remain a resident of the home state. If that nonmilitary spouse does remain a resident of the home state, only the home state may tax the nonmilitary spouse's wages. Wages earned in Montana that are sourced to the home state are not Montana source income.

(b) Qualified nonmilitary spouses must claim an annual exemption from wage withholding by completing Form MSR � Employee Certificate of Status under the Military Spouses Residency Relief Act.

(c) If and when a nonmilitary spouse no longer meets the requirements of MSRRA, their wages are sourced to Montana as provided in 15-30-2101, MCA. The following events disqualify the nonmilitary spouse's wages for special treatment under MSRRA:

(i) the military spouse leaves the military;

(ii) the nonmilitary spouse becomes a resident of Montana;

(iii) the marriage to the military spouse terminates; and

(iv) physical separation due to a duty change when the military spouse's orders move them outside Montana and their spouse is allowed to join them but chooses not to.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

(1) A nonresident taxpayer whose only activities in Montana consist of making sales and do not include owning or renting real or tangible personal property and whose dollar volume of gross sales made in Montana during the taxable year does not exceed $100,000, may elect to pay a tax of 1/2% on the gross volume of sales made in Montana during the taxable year. Such tax is in lieu of the tax based upon net income as described in 15-30-2101(1), MCA.

(2) The election to pay the alternative tax is made by filing a return on Form 2, reporting the dollar amount of Montana gross sales and paying a tax determined on the basis of 1/2% of the amount of such sales. The gross volume of sales made in Montana must be determined according to the provisions of paragraph 16 and 17 of Article IV of the Multistate Tax Compact. A statement must be attached to the return to the effect that the taxpayer's only activities in Montana consist of making sales and do not include owning or renting real property or tangible personal property.

(1) For purposes of the reporting requirements for individuals, trusts, and estates that have Montana apportionable or nonapportionable income and determining their Montana tax liability, the department adopts by reference the following rules contained in ARM Title 42, chapter 26 – Corporate Multistate Activities subchapters:

(a) 1 - General Provisions;

(b) 2 - Income Allocation and Apportionment, except ARM 42.26.204, 42.26.228, 42.26.229, and 42.26.260;

(c) 4 - Special Rules Related to Installment Sales;

(d) 6 - Railroads;

(e) 7 - Trucking;

(f) 8 - Airlines;

(g) 9 - Special Rules for Construction Contracts;

(h) 10 - Publishing Companies - Apportionment;

(i) 11 - Television and Radio Broadcasting;

(j) 12 - Telecommunication Services for Corporate Income Taxes; and

(k) 13 - Financial Institutions.

(2) The taxpayer may petition for or the department may require an alternative method of reporting activity in the state as provided in 15-1-601, MCA.

(3) When applying the rules referred to in (1), the terms "individual," "trust," or "estate" replace the term "corporation," and the provisions of Title 15, chapter 30, MCA, replace references to Title 15, chapter 31, MCA.

This rule has been transferred.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

The following definitions apply to rules found in this subchapter:

(1) "Armed forces" means the United States Army, Navy, Marine Corps, Air Force, or Coast Guard.

(2) "Obligation" means, for the purposes of determining the applicability of the exclusion of interest income, an interest-bearing financial instrument of the United States government, a state, or a political subdivision, in the form of a bond, other written certificate, or loan issued pursuant to the exercise of such governmental body's borrowing power for use in governmental operations.

(1) If a taxpayer claims an itemized deduction for federal income taxes paid under 15-30-2131(1)(b), MCA, in one tax period and subsequently receives a refund of those taxes paid in another tax period, the amount of refund that is taxable under 15-30-2110(1)(b), MCA, is computed as though the taxpayer had paid the proper amount of federal tax and claimed the appropriate deduction during the period. A taxpayer whose deduction for federal income taxes was limited under 15-30-2131(1)(b), MCA, for tax years beginning after December 31, 2004, would only report the portion of their refund that reduces their tax paid below the applicable limitation.

(2) The following examples illustrate the application of this rule:

(a) Example 1 - Taxpayer A pays $15,000 in federal income taxes in year one, has no other itemized deductions, files as 'single' on his Montana state income tax return, and receives a federal refund in year two of $8,000. If the taxpayer had paid the proper tax during year one, his federal taxes paid would have been $7,000. Since his Montana deduction for federal taxes is limited to $5,000 in both situations, none of the refund would be included in Montana taxable income.

(b) Example 2 - Married taxpayers B and C pay $20,000 in federal income taxes in year one, have no other itemized deductions, file as 'joint' on their Montana state income tax return, and receive a federal refund in year two of $12,500. If the taxpayers had paid the proper tax during year one, their federal taxes paid would have been $7,500. Since their Montana deduction for federal income taxes was limited to $10,000, only $2,500 of their federal refund would be included in Montana taxable income.

(c) Example 3 - Taxpayer D pays $6,500 in federal income taxes in year one, has other itemized deductions totaling $4,500, files as 'single' on her Montana state income tax return, and receives a federal refund in year two of $4,100. If the taxpayer had paid the proper tax during year one, her federal taxes paid would have been $2,400. Since her Montana deduction for federal income taxes was limited to $5,000, only $2,600 of her federal refund would be included in Montana taxable income.

(3) The provisions under (1) and (2) shall be effective for tax year 2006 forward.

(4) Unless clearly attributable to one spouse, married taxpayers who filed a joint federal return but separate Montana returns in the prior year and received a federal refund are required to prorate the federal income tax refund between spouses by applying the ratio of the federal income tax deduction claimed on the Montana return in the prior year.

(a) Example: Spouses A and B filed a joint federal return but separate Montana returns for 2006. Spouse A claimed a deduction for federal income taxes of $5,000 and spouse B claimed a deduction of $3,000 for a total of $8,000. If the taxpayers received a federal refund in the amount of $1,000, spouse A would use $625 ($5,000/8,000 * $1,000) and spouse B would use $375 ($3,000/8,000 * $1,000) in calculating how much of their federal refund is taxable in Montana under the tax benefit rule.

(1) Except as provided in (2) and (3), married taxpayers who file a joint federal return but separate Montana returns must compute their taxable income using the federal rules for married taxpayers filing separately. Items clearly attributable to one spouse must be claimed by that spouse. An item not clearly attributable to one spouse must be divided equally unless the spouses enter into a binding written agreement providing a different division.

(2) The following items are exceptions to (1) as provided for in 15-30-111, MCA:

(a) Married taxpayers filing a joint federal return allowed a capital loss deduction under section 1211 of the Internal Revenue Code, 26 U.S.C. 1211, and who file separate Montana returns may claim the same amount of capital loss deduction allowed on the federal return. If the allowable capital loss is clearly attributable to one spouse, the loss must be shown on that spouse's return. If the loss is not clearly attributable to one spouse, the loss must be split equally between each return. The aggregate loss of spouses attributable to a capital loss can never exceed the amount of losses allowable for federal income tax purposes to spouses filing a joint federal income tax return for that loss. For example, spouse A has a $5,000 current year capital gain and spouse B has a $9,000 capital loss carried over from prior years for state purposes but which had been absorbed on their federal return in a prior year. If the spouses file in Montana as "married filing separately," spouse A should report the $5,000 capital gain on the appropriate line of the "Federal Income" portion of the return and report $5,000 as a "Capital Loss Adjustment" on Schedule II, Montana Subtractions from Federal Adjusted Gross Income. Spouse B should report $3,000 on the same line on Schedule II since the capital loss is attributable to them. Spouse B will then have a remaining capital loss carryover of $1,000 ($9,000 current capital loss less $8,000 used).

(b) Married taxpayers filing a joint federal return allowed passive and rental income losses are not required to recompute allowable losses according to the federal rules for married taxpayers filing separately under section 469 of the Internal Revenue Code, 26 U.S.C. 469. If the allowable loss is clearly attributable to one spouse, the loss must be shown on that spouse's return. If the loss is not clearly attributable to one spouse, the loss must be split equally between each return. The aggregate losses of spouses attributable to a passive loss or rental loss can never exceed the amount of losses allowable for federal income tax purposes to spouses filing a joint federal income tax return for that loss.

(c) Married taxpayers filing a joint federal return in which one or both of the taxpayers are allowed a deduction for an individual retirement contribution under section 219 of the Internal Revenue Code, 26 U.S.C. 219, and who file separate Montana income tax returns may claim the same amount of the deduction that is allowed on the federal return. The deduction must be attributed to the spouse who made the contribution. This provision does not affect any contributions made for tax years beginning before January 1, 2007.

(d) Married taxpayers filing a joint federal return who are allowed a deduction for interest paid for a qualified education loan under section 221 of the Internal Revenue Code, 26 U.S.C. 221, and who file separate Montana income tax returns may claim the same amount of the deduction that is allowed on the federal return. The deduction may be split equally on each return or in proportion to each taxpayer's share of federal adjusted gross income. This provision does not affect any interest paid during tax years beginning before January 1, 2007 for which the deduction was not allowed on the Montana tax return.

(e) Married taxpayers filing a joint federal return who are allowed a deduction for qualified tuition and related expenses under section 222 of the Internal Revenue Code, 26 U.S.C. 222, and who file separate Montana returns may claim the same amount of the deduction that is allowed on the federal return. The deduction may be split equally on each return or in proportion to each taxpayer's share of federal adjusted gross income. This provision does not affect any expenses paid during tax years beginning before January 1, 2007, for which the deduction was not allowed on the Montana tax return.

(3) For tax years beginning on or after January 1, 2009, married taxpayers filing a joint federal return and separate Montana returns may elect to report their capital gains and losses using one of the following options:

(a) The couple may elect to allocate the net gain or loss reported on page 1 (line 10 on Form 1040A or line 13 on Form 1040) of their joint federal return based on their ownership percentage. For example, if the couple reports a net capital gain of $10,000 on their joint federal return and they owned the asset equally, each spouse shall report $5,000 on their separate Montana returns. If only one spouse owned the asset, that spouse shall report $10,000 on the separate return. If the couple reports a net capital loss of $3,000 on their joint federal return and they owned the asset equally, each spouse shall report $1,500 on their separate Montana returns. If only one spouse owned the asset, that spouse shall report the $3,000 on their return and the other spouse shall report $0.

(b) The couple may elect to track their capital gains and losses individually and separately. If a federal net capital gain or loss is comprised of the capital gains attributable to one spouse offset by capital losses attributable to the other spouse, each spouse would report their separately calculated gain or loss. The maximum net capital loss deduction either spouse reporting a loss may claim would be limited to $1,500.

This rule has been transferred.

This rule has been repealed.

(1) Certain capital gain and dividend income realized by an individual from an investment in a small business investment company is exempt from taxation. The rules regarding small business investment companies are located in ARM Title 42, chapter 23, subchapter 1.

(1) The following items of military compensation received by a resident service member are exempt from Montana income tax:

(a) basic, special, and incentive pay received for serving on active duty as a member of the regular armed forces;

(b) basic, special, and incentive pay received for serving on active duty as a member of the National Guard under Title 10 USC orders;

(c) basic, special, and incentive pay received by a member of a reserve component of the armed forces or a member of the National Guard, for active duty in a "contingency operation" as defined in 10 USC 101; and

(d) basic, special, and incentive pay received by a member of the National Guard performing a "homeland defense activity" as defined in 32 USC 901.

(2) Military compensation that is not exempt from Montana income tax includes:

(a) salary received for annual training and inactive duty training for service not described in (1)(b) through (1)(d);

(b) salary received by a member of a reserve component of the armed forces for service not described in (1)(b) through (1)(d);

(c) salary received by a member of the National Guard engaged in "active Guard and Reserve duty" as defined in 10 USC 101, for service not described in (1)(b) through (1)(d); and

(d) retired, retainer, or equivalent pay, or allowances.

(3) As provided in the Military Family Tax Relief Act of 2003, for federal income tax purposes a member of a reserve component of the armed forces may deduct certain travel expenses incurred after December 31, 2002, in connection with serving more than 100 miles away from home. Because the deduction reduces federal adjusted gross income, the deduction also reduces the service member's income subject to Montana tax.

(1) If a taxpayer or a taxpayer's spouse is age 65 or over, certain interest income is exempt as provided in this rule.

(2) If a taxpayer is single, the taxpayer may exclude up to $800 of interest income included in the taxpayer's Montana adjusted gross income.

(3) If married taxpayers file a joint return, they may exclude up to $1600 of interest income included in their joint or in their separate Montana adjusted gross income even if only one spouse is age 65 or over.

(4) If a married taxpayer who is age 65 or older files separately, the taxpayer may exclude up to $800 of interest income earned by them and included in their Montana adjusted gross income. The taxpayer may not exclude interest income earned by the taxpayer's spouse.

(5) The exclusion cannot exceed the amount reported as taxable interest income.

(1) Interest on United States government obligations, as defined in ARM 42.15.204, and mutual fund dividends attributable to that interest, to the extent included in federal adjusted gross income, are exempt from Montana income tax. Interest on obligations of U.S. territories and government agency obligations specifically exempted by federal law, and mutual fund dividends attributable to that interest, are also exempt from Montana income tax.

(2) United States obligations that are exempt include:

(a) series E, EE, F, G, H, and HH savings bonds;

(b) U.S. treasury bills;

(c) U.S. government notes; and

(d) U.S. government certificates.

(3) Interest received from guarantees that do not conform to the definition in ARM 42.15.204, or obligations guaranteed by the United States government including mutual fund dividends attributable to Government National Mortgage Association (Ginnie Mae) bonds, Federal National Mortgage Association (Fannie Mae) bonds, and Federal Home Loan Mortgage Corporation (FHLMC) securities, are not tax-exempt.

(1) A taxpayer qualifies for the disability income exclusion if they:

(a) are under age 65;

(b) are retired on disability;

(c) were permanently and totally disabled when they retired; and

(d) have not, for this or a prior tax year, treated their disability income as a pension or annuity.

(2) The adjusted gross income used in the computation of the exclusion is the taxpayer's Montana adjusted gross income computed without this exclusion.

(3) If the qualified taxpayer is married and files separately, the Montana adjusted gross income of the taxpayer and their spouse must be combined to compute the exclusion.

(4) The taxpayer must on the department's request provide satisfactory proof of disability. Satisfactory proof includes a document issued by a governmental unit, such as the Social Security Administration, certifying the taxpayer's permanent and total disability. If such certification is not available, the department may require other forms of verification that establish the taxpayer's permanent and total disability.

(1) Adjusted gross income for tax years beginning after December 31, 1986, does not include 40% of the deferred capital gain on assets sold or exchanged on or before December 31, 1986.

(2) The capital gain exclusion applies only to the deferred gain on installment sales of items considered capital assets under Subchapter P, Parts I, II, III and IV of Chapter I of the IRC as it read on December 31, 1986.

(3) The capital gain from the sale or exchange of a capital asset is the sales price or fair market value less the taxpayer's adjusted basis in the asset as determined for federal purposes prior to December 31, 1986.

(4) The deferred capital gain exclusion applies only after the capital gain is netted against capital losses as set forth in Subchapter P of Chapter I of the IRC as of December 31, 1986.

(5) When the taxpayer has both pre-1987 deferred and other gains, the prorated share of net capital gain that is eligible for the exclusion is the installment sale deferred capital gain divided by the total capital gain times the net capital gain. For example, when there is $30,000 of deferred capital gain, $70,000 of other capital gain and $40,000 of capital losses the prorated share of the net capital gain is $18,000 ($30,000 divided by $100,000 times $60,000).

(6) The deferred capital gain is the total amount of principal payments received in one year times the gross profit percentage. The gross profit percentage is the sales price less the seller's adjusted basis of the capital asset divided by the contract price of the installment sale.

(7) When married filing separate returns, the deferred capital gain exclusion may be divided equally when there is jointly owned property involved. Otherwise, the exclusion must be taken by the person who owned the property.

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(1) For tax years beginning January 1, 2016, the pension and annuity exclusion is limited to the lesser of the pension and annuity income received or $4,070 for a single person or married couple where only one person receives pension or annuity income.

(a) The exclusion is reduced $2 for every $1 of federal adjusted gross income in excess of $33,910 as shown on the taxpayer's return.

(b) By November 1 of each year, the department will multiply the exclusion amount and the federal adjusted gross income amount in (a) by the inflation figure for the taxable year as prescribed in 15-30-2110, MCA.

(2) When married taxpayers file a joint return and each receives pension and annuity income, their individual exclusion is limited to the lesser of each person's retirement income or the amount allowed in (1). The total of both individuals' exclusion is phased out at the rate described in (1).

(3) When married taxpayers file separately, each spouse's exclusion and phase-out are computed independently and a spouse's exclusion begins to be phased out only when his or her federal adjusted gross income exceeds the amount allowed in (1)(a).

(4) Examples illustrating the application of (1) through (3) are:

(a) Jane, a single taxpayer, has federal adjusted gross income of $30,000 which is made up of $5,000 of pension income and $25,000 of other income. In 2016, her pension and annuity exclusion for Montana purposes is limited to $4,070.

(b) John, a married taxpayer, files separately from his spouse and has a federal adjusted gross income of $35,000, which consists of $17,000 of taxable pension income and $18,000 of other income. In 2016, John's Montana pension exclusion is reduced to $1,890 as a result of the limitation based on his federal adjusted gross income. ($4,070 - (($35,000 - $33,910) x 2)).

(c) Frank and Edith, a married couple, file a joint income tax return and both receive pension and annuity income. Frank's taxable pension included in federal adjusted gross income is $10,000. Edith's taxable pension included in federal adjusted gross income is $2,000. Their combined federal adjusted gross income is $30,000. Their Montana pension and annuity exclusion is limited to their individual pensions. As a result, Frank receives the maximum $4,070 allowable in 2016 and Edith receives $2,000. The total they can claim as Montana pension exclusion on their 2016 Montana tax return is $6,070.

(d) Assume the same facts as in (c), but Frank and Edith's 2016 federal adjusted gross income is $35,000. The reduction based on federal adjusted gross income applies, and their combined Montana pension annuity exclusion is $3,890. ($6,070 - (($35,000 - $33,910) x 2)).

(1) Wages are exempt from individual income tax when:

(a) the individual is an enrolled tribal member of the governing tribe of the reservation on which the enrolled tribal member works and resides; and

(b) the wages are derived from reservation sources.

(2) When wages are derived from both reservation sources and nonreservation sources, only wages derived from reservation sources are exempt from taxation, provided the individual meets all the criteria in (1).

(3) When a Native American does not reside on his or her reservation for an entire year, only wages earned while he or she was residing on the reservation are exempt from taxation, provided he or she meets all the criteria in (1).

(4) A Native American residing outside the boundaries of his or her reservation has no special exemption other than income derived directly from allotted or restricted lands, held in trust by the United States.

(1) The unearned income of a dependent child that is included in a parent's federal adjusted gross income pursuant to the IRC is exempt from taxation if for the tax year:

(a) the child is not required to file a Montana individual income tax return; or

(b) the child filed a Montana individual income tax return reporting the income.

(1) Retirement benefits paid by the Railroad Retirement Board are exempt from Montana income tax.

(2) The taxable and excludable portions of social security benefits are determined in the same manner as determined for federal income tax purposes except that federal modified adjusted gross income must be modified as provided in (3) to determine Montana modified adjusted gross income, and Montana modified adjusted gross income must be used to determine the extent to which modified adjusted gross income exceeds the federal base and adjusted base amounts.

(3) Federal modified adjusted gross income, determined as provided in section 86 of the IRC, must be:

(a) increased by the additions to federal adjusted gross income provided in 15-30-2110, MCA, and any other additions to Montana taxable income provided in Title 15, MCA; and

(b) decreased by the reductions to federal adjusted gross income provided in 15-30-2110, MCA, other than tax-exempt interest on United States obligations or interest on any state or county municipal bonds. In determining the taxable and excludable portions of social security benefits, a married person filing separately who has filed a joint federal income tax return must use one-half of the federal base and adjusted base amounts.

(1) The following must file an individual income tax return:

(a) every resident who is a single person, and every resident who is a married person who does not elect or, as provided in ARM 42.15.321, is not allowed to elect, to file a joint return with a spouse, must file a return if the person's gross income from all sources for the taxable year is more than $4,370, adjusted as provided in (2);

(b) married persons, both of whom are residents, not filing separate returns must file a joint return if their combined gross income for the taxable year from all sources exceeds $8,740, adjusted as provided in (2);

(c) every nonresident who is a single person, and every nonresident who is a married person who does not elect or, as provided in ARM 42.15.321, is not allowed to elect, to file a joint return with a spouse, must file a return if the person has any Montana source income or loss and their gross income from all sources is more than $4,370, adjusted as provided in (2); and

(d) married persons, both of whom are full-year nonresidents, not filing separate returns, must file a joint return if either or both of them have any Montana source income or loss and their combined gross income for the taxable year from all sources exceeds $8,740, adjusted as provided in (2).

(2) The minimum gross income amounts requiring filing a return shown in (1) were calculated for tax year 2014. Minimum gross income amounts:

(a) are adjusted annually in accordance with 15-30-2602, MCA. By November 1 of each year, the department will multiply the minimum amount of gross income necessitating filing by the inflation figure for the current taxable year;

(b) are increased by the value of any exemptions the person is entitled to for age 65 or for blindness, but are not also increased by the exemption allowed for all taxpayers under 15-30-2114(2)(a), MCA; and

(c) can be obtained for previous tax years by accessing the past-year downloadable tax forms from the homepage of the department's web site at revenue.mt.gov.

(3) The following must file a fiduciary return:

(a) the estate of a decedent who was a resident must file a return if its gross income for the year from all sources exceeds its exemption allowance;

(b) the estate of a decedent who was a nonresident must file a return if its gross income from all sources exceeds its exemption allowance, and the estate has any Montana source income; and

(c) a nonbusiness trust which is not a grantor trust and is subject to the Montana Trust Code, Title 72, chapter 33, MCA, must file a return if its gross income for the year from all sources exceeds its exemption allowance.

(4) A nonresident's distributive share of a pass-through entity's Montana source income is included in determining a nonresident's obligation to file a Montana individual income tax return. A nonresident whose only Montana source income for the tax year is from one or more partnerships or S corporations, each of which has elected to file a composite return and pay a composite tax on behalf of consenting participants, is not required to file an individual income tax return. A nonresident who has Montana source income from a partnership or S corporation who does not elect to file a composite return or who has any other Montana source income (for example, wages from employment in Montana or rental income from property located in Montana), is required to file a Montana individual income tax return if the gross income from all sources, adjusted as provided in this rule, exceeds the applicable limit. 

This rule has been repealed.

(1) Any taxpayer who for any reason is unable to make a return may have the return made by a designated agent. In the case of a minor, the return may be made by the minor or by a guardian or other person charged with the minor's care or property. In the case of a taxpayer who is mentally or physically incapable of making a return, the return for such person shall be made by the guardian or other person charged with the care of the taxpayer's person or property.

(2) A return must be filed for a decedent covering the period from the beginning of the taxable year to the date of death. If the deceased taxpayer was married, a joint return may be filed to include the income of the decedent for the period the decedent was alive and the income of the surviving spouse for the entire taxable year. The executor or administrator of the decedent is responsible for making the decedent's return.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

The following definitions apply to rules found in this subchapter:

(1) "Injured spouse" means a taxpayer who does not owe a child support obligation, but who has reported income on a joint return with a taxpayer who does owe a past due child support obligation.

(2) "Innocent spouse relief applicant" means a taxpayer who has filed joint federal and Montana tax returns for the same tax year, has obtained relief from a joint and several federal tax liability under section 6015 of the IRC, and is requesting relief from a joint and several Montana income tax liability.

(3) "Obligated spouse" means a taxpayer who is liable for a past due child support obligation.

This rule has been transferred.

(1) Subject to the following conditions and except as provided in (2), the department will accept paper copies of official tax return forms and other supporting documents. These forms must be:

(a) facsimiles of the official form;

(b) produced on paper which may readily and permanently be written upon and stamped with ink; and

(c) of the same size as the official form.

(2) The department will not accept reproductions of scannable payment coupons.

This rule has been repealed.

(1) When a taxpayer's federal taxable income is changed or corrected by the IRS, or other authority, the taxpayer must file an amended return within 180 days after the final determination date.

(2) When a taxpayer changes his or her own federal taxable income by amending his or her federal income tax return, the taxpayer must file an amended return reporting these changes within 180 days after filing the federal amended tax return.

(3) Interest and penalty are assessed on any unpaid tax under the original return from the prescribed due date of the original return until the department receives payment.

(1) An original return is considered to be the return that is due on the fifteenth day of the fourth month after the close of the taxpayer's tax year.

(2) Original returns are Montana Forms 2, 2EZ, and FID-3 only. Montana Form 2M applies only to tax year 2014 and prior years.

(3) An amended return is not an original return but only a correction to an original return.

(4) An amended return will not be accepted without an original return being on file with the department.

(5) Late file and late pay penalties are assessed as required under 15-1-216, MCA, on the correct amount due on the original return.

(6) The late file and late pay penalties will be adjusted based on the corrected amount of tax due, which results from an amended return, adjustment from an audit, or correction to the original return.

(7) If required by 15-1-216, MCA, interest will be calculated on the original return. If an amendment is made to the original return, interest will be calculated as required under 15-30-2609 or 15-30-2602, MCA, as of the due date in (1).

(8) An extension of time to file an original return does not extend the time to pay. When an original return is filed before the extension date and payment is not made, the return is subject to late pay penalties.

(9) If an extension of time to file has been made and the original return was not filed before the extension deadline, the original return is subject to late file and late pay penalties.

(10) When an original return for tax years beginning on or after January 1, 2010, is filed after the extended due date, and the department does not issue the requested refund within 45 days of receiving the return, interest as allowed under 15-30-2609, MCA, is payable from the date the return was filed. For example, an original return for tax year 2016 requesting a refund is filed November 12, 2017, and the department does not issue the refund until January 30, 2018. Refund interest is payable from the date the return was filed (November 12, 2017) until the date the refund was issued (January 30, 2018).

(11) The appeal process, provided in ARM 42.2.613 through 42.2.621, will apply to adjustments and corrections made by the department to a filed amended return.

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(1) For tax years beginning after December 31, 2015, and before January 1, 2017, a six-month extension of time to file an individual income tax return is automatically allowed a taxpayer if the following conditions are met on or before the due date of the return:

(a) the taxpayer has applied for an extension of time to file their federal income tax return; and

(b) the taxpayer has paid either through withholding, estimated tax payments, or a combination of withholding and estimated payments, either of the following:

(i) 90 percent of their current year's income tax liability; or

(ii) 100 percent of their prior year's income tax liability.

(2) A taxpayer's tax liability and percent level of payment are determined as provided in ARM Title 42, chapter 17, subchapter 3.

(3) If a taxpayer does not meet either of the required payment thresholds as required by 15-30-2604, MCA, late pay and late file penalties will be applied as provided in 15-1-216, MCA.

(4) Underpayment interest, as provided in 15-30-2512, MCA, accrues to the original due date of the return. Interest from and after the original due date of the return accrues as provided in 15-1-216, MCA, whether or not the time for filing the return has been extended.

(5) The underpayment is calculated as provided in ARM Title 42, chapter 17, subchapter 3.

(6) For tax years beginning after December 31, 2011, and before January 1, 2017, an individual whose income tax liability for the current year is $200 or less, and who pays the entire tax liability and files his or her return on or before the extended due date provided for in 15-30-2604(3)(a), MCA, will not be charged interest or the penalties for late filing and late payment.

(7) For tax years beginning on or after January 1, 2017, a six-month extension of time to file an individual income tax return is automatically allowed a taxpayer if the tax, penalty, and interest are paid when the return is filed.

(8) Taxpayers who are either first time filers, or have a zero or negative taxable income for the previous year, are considered to have paid 100 percent of the previous year's tax for purposes of meeting the threshold requirements in 15-30-2604, MCA.

(1) In lieu of other evidence, a postmark issued by the United States Postal Service is considered the date of filing. To be timely, paper filings must be postmarked on or before the due date.

(1) Net operating losses must be determined as provided in section 172 of the IRC. A taxpayer has a Montana net operating loss if their Montana taxable income, recomputed with the adjustments provided in section 172(d) of the IRC, is less than zero. In recomputing Montana taxable income, the following must be added back:

(a) any net operating loss deduction;

(b) any deduction for personal and dependent exemptions if the taxpayer is an individual, and the exemption provided in 15-30-2152, MCA, if the taxpayer is an estate or trust;

(c) any gain excluded from the sale or exchange of qualified small business stock pursuant to section 1202 of the IRC;

(d) the amount by which a deduction for losses from sales or exchanges of capital assets exceeds the amount includable for gains from sales or exchanges of capital assets; and

(e) the amount by which nonbusiness deductions exceed nonbusiness income.

(2) When computing the net operating loss, the carrybacks, and carryovers, and the refund limits of taxpayers whose marital or filing status has changed, the federal rules and instructions applicable to change in marital status and change in filing status must be followed.

(3) A nonresident who owns a business that operates both within and without Montana must follow the provisions in 15-1-601, MCA, and the principles of allocation and apportionment located in ARM Title 42, chapter 26 to determine the amount of the business-wide loss attributable to Montana.

(4) To determine the portion of a deductible expense attributable to income from a trade or business, the expense must be multiplied by the ratio of net income from the trade or business to Montana adjusted gross income. When calculating the portion of federal tax attributable to trade or business income, the ratio must be calculated using the net business income and Montana adjusted gross income for the year the federal tax was incurred.

(5) The election to waive the carryback of a net operating loss on the federal return does not waive the carryback for Montana purposes and a separate election must be made. A taxpayer may elect to waive the carryback of a net operating loss even if the taxpayer has not made the election to waive the carryback on the federal return. The election to waive the carryback is made on forms provided by or authorized by the department.

(6) An election to waive the carryback of the net operating loss is irrevocable. If a taxpayer elects to waive the carryback, the election must be made by the due date (including extensions of time) for filing the taxpayer's return for the tax year of the net operating loss.

(1) The due date for filing an individual income tax return and payment of the tax due is the 15th day of the 4th month following close of the tax year.

(2) A return may be filed by personal delivery, mail, and electronically.

(a) A return may be filed by personal delivery to:

Department of Revenue

3rd Floor, Sam W. Mitchell Building

125 North Roberts

Helena, Montana 59620

(b) A return may be filed by mailing it postage prepaid by U.S. Postal Service First-Class or Priority mail to:

DEPARTMENT OF Revenue

P.O. Box 5805

Helena, Montana 59604-5805

(i) If a return is mailed as provided in this section, on or before the due date, and received by the department, the return is considered filed on the date mailed. A taxpayer is responsible for establishing the date a return is mailed.

(c) The rules for filing a return electronically are located in ARM Title 42, chapter 5, subchapter 2.

(3) Every taxpayer must compute their tax liability and pay the balance of any tax due in full on or before the prescribed due date as stated in 15-30-2602, MCA. If the balance due is less than $1, payment is not required. If full payment of the balance due is not made on or before the prescribed due date, interest and penalty accrue from the prescribed due date of the return until paid as provided in 15-1-216, MCA.

(a) If tax is paid by check or money order, the check or money order should be made payable to the "Montana Department of Revenue."

(b) The rules for paying a tax electronically are located in ARM Title 42, chapter 5, subchapter 2.

(c) The rules for paying a tax by credit card are located in ARM Title 42, chapter 5, subchapter 2.

This rule has been repealed.

(1) A joint return may be filed even though one of the spouses has no income or deductions. However, a joint return is not permitted if any of the following apply:

(a) the spouses have different taxable years;

(b) one is a resident and one is a nonresident; or

(c) either spouse is a part-year resident.

(2) A joint return must include all income and deductions of both spouses. If a joint return is filed, both the husband and the wife must sign the return, and both are jointly and severally liable for the tax.

(3) Married taxpayers who have filed a joint return may not revoke their election to file jointly and file separately unless the following conditions are met:

(a) both spouses must agree to file separately on the same form;

(b) all prior years' tax liabilities must be paid; and

(c) the tax liability determined under the joint return for the tax year for which a change is sought must be paid.

(1) If husband and wife file separate returns, each must report their own adjusted gross income. Under no circumstances may income be arbitrarily assigned from one spouse to the other.

(2) Income from salaries, wages, bonuses, and commissions and other income derived from personal services rendered either as an employee or as an independent contractor, must be reported by the spouse who earned it.

(3) Income such as rents, royalties, dividends, and interest must be reported by the spouse who owns the property from which the income is derived. If such income is derived from property which is jointly owned by the spouses, the income must be split equally unless the taxpayers show a different proportional ownership.

(4) Income from pass-through entities must be reported by the spouse who is the partner, shareholder, member, or other owner of the interest in the pass-through entity to which the income is attributable. If such income is derived from the joint ownership of stock in a corporation, the income must be split equally unless the taxpayers show a different proportional ownership.

(5) The net income from any business conducted as a sole proprietorship or conducted by a disregarded entity that is treated as a sole proprietorship, must be reported in full by the spouse who is the individual proprietor. However, in the event the proprietor's spouse regularly and systematically renders substantive personal services in the operation of the business and with respect to which services he or she is not paid a salary or wages, the proprietor and the spouse may, at their option, agree that the spouse earned an amount equivalent to reasonable compensation for the services rendered, and such amount shall be deemed income taxable to that spouse as compensation for services rendered, and such amount shall reduce the proprietorship income taxable to the spouse who is the actual proprietor. Income deemed earned by the spouse for services rendered cannot be justified solely by a legal property-holding arrangement, but must be justified by showing a substantial contribution of personal services. The allocated amount cannot exceed the gross income derived from a sole proprietorship.

(6) This rule applies to income earned on or after January 1, 1973.

This rule has been repealed.

This rule has been transferred.

(1) A taxpayer must provide information the department requests to ascertain the correctness of a return within 30 days after the date of the request or obtain the department's consent to provide the information at a later date. If the taxpayer does not provide this information within 30 days, or as agreed upon, the department will adjust or disallow any amount or item that remains unverified. If the request is in writing, the 30 days are computed from the date of the written request.

(2) If a taxpayer does not file a delinquent return within 30 days after the date of a written request to file the return or obtain the department's consent to file the return at a later date, the department will estimate the taxpayer's taxable income.

(3) Failure to supply the information requested or to file a requested return will result in the assessment of tax and the assessment of interest and penalty as provided in 15-1-216 , MCA.

(1) A taxpayer may request the department to adjust a joint tax return that was filed in the circumstance where the refund is being offset by the department for a child support arrearage.

(2) The adjustment will reflect the dollar amount of the refund that is attributable to the "obligated spouse," and the part of the refund that is attributable to the "injured spouse." The amount attributable to the injured spouse will be deemed exempt from offset.

(3) This request must be made in writing, and must be made within 30 days after the Notice of Offset and Opportunity for Hearing is mailed to the taxpayer.

(4) The provisions of this rule do not apply to a taxpayer requesting innocent spouse relief as provided under 15-30-2646, MCA. The rules for innocent spouse relief are located in ARM 42.15.329.

(1) The written request for an adjustment of the joint tax return referenced in ARM 42.15.326, shall include a statement entitled "injured spouse statement." Before any adjustment can be considered, this statement must:

(a) contain the identical social security numbers of both spouses in the same order as they appear on the original joint tax return;

(b) clearly indicate how any income, itemized deductions, exemptions, credits, and tax payments (as originally claimed) should be divided between the spouses;

(c) be signed by both spouses; and

(d) be mailed to:

Department of Revenue

P.O. Box 5805

Helena, Montana 59604-5805.

(2) This statement, when mailed to the department, does not relieve the obligated taxpayer of the responsibility for requesting a hearing, in writing, if the taxpayer wishes to contest the child support debt. This request must be made within 30 days after the notice of offset and opportunity for hearing is mailed to the taxpayer.

(3) The department will review the statement and the tax return, make the adjustment of the tax liability and refund, and will subsequently notify the taxpayer in writing of the final determination. If the taxpayer disagrees with the adjustment made by the department, the taxpayer may request a reconsideration of the adjustment pursuant to ARM 42.2.613 through 42.2.621.

(1) A claim for refund may be in the form of an amended return, a formal claim, or any written instrument signed by the taxpayer, clearly stating the facts concerning payment of the tax and the grounds upon which the claim is based. If the claim is not made on an amended return form, it must be mailed to:

DEPARTMENT OF Revenue

P.O. Box 5805

Helena, MT 59604-5805.

(2) Relief may not be granted in excess of the relief granted by the IRS.

(3) The following requirements must be met, before the department may consider an application for innocent spouse relief:

(a) the innocent spouse relief applicant must make a written request stating the reasons and specific periods for which the relief is requested;

(b) the innocent spouse relief applicant must have received Innocent Spouse Relief under section 6015 of the IRC from the IRS to be eligible for consideration by Montana; and

(c) the innocent spouse relief applicant must provide the Department of Revenue with complete copies of all correspondence to and from the IRS, and documentation that relief has been granted by the IRS for those periods.

(4) The innocent spouse relief applicant shall provide a copy of any court order stating that the spouse or former spouse is responsible for paying the taxes.

(5) The taxpayer shall include on the application any other documents and information demonstrating the reasons why relief should be granted, as required in 15-30-2646, MCA.

(6) Upon request, the innocent spouse relief applicant requesting relief shall provide any additional information necessary to compute each spouse's separate Montana tax liability.

(7) When the review has been completed, the applicant will be advised of the decision of the department, and given the option to appeal if they disagree with the decision.

(8) The provisions of this rule only apply to individual income tax liabilities arising from a joint Montana return for tax years beginning after December 31, 2002.

The following definitions apply to rules found in this subchapter:

(1) "Child" means a son, stepson, daughter, stepdaughter, or legally adopted son or daughter of the taxpayer. The term does not include the following persons who are within the definition of "child" for purposes of determining dependent exemptions for federal income tax purposes:

(a) a child who lived with the taxpayer in the taxpayer's home as a member of the taxpayer's family if placed with the taxpayer by an authorized placement agency for legal adoption; or

(b) a foster child (any child who lived with the taxpayer in the taxpayer's home as a member of the taxpayer's family for the entire year).

(2) "Dependent" has the same meaning as "dependent" for purposes of determining dependent exemptions for federal income tax purposes, except as follows:

(a) The list of individuals in 15-30-2115, MCA, for whom a Montana dependent exemption is allowed is broader than the list of eligible relatives for whom a federal dependent exemption is allowed. The list includes a cousin or other lineal descendant of the sister or brother of the mother or father of the taxpayer, if for the taxpayer's tax year the individual received institutional care because of physical or mental disability, and if, before receiving the institutional care, they lived with the taxpayer in the taxpayer's home as a member of the taxpayer's family.

(b) The list of individuals in 15-30-2115, MCA, for whom a Montana dependent exemption is allowed is narrower than the eligible list of individuals for whom a federal dependent exemption is allowed and excludes a child placed for adoption, a foster child, and any other person who is not related to the taxpayer as provided in 15-30-2115, MCA, unless:

(i) their gross income did not exceed the limits provided in this rule; and

(ii) they lived with the taxpayer in the taxpayer's home as a member of the taxpayer's family for the entire tax year.

(c) A federal dependent exemption may be claimed for a person under a multiple support agreement exception even if the taxpayer does not provide over half of their total support. Because Montana does not provide a multiple support agreement exception, a dependent exemption is not allowed for any person who does not receive over half of their total support from the taxpayer. See the definition of "support," however, for special rules for determining the support of a child of divorced or separated parents.

(3) "Educational institution" has the same meaning as "educational institution" for purposes of determining dependent exemptions for federal income tax purposes.

(4) "Support" has the same meaning as "support" for purposes of determining dependent exemptions for federal income tax purposes except as follows:

(a) Under the federal rules, the support provided to an individual by both spouses is considered only if a joint return is filed. For Montana income tax purposes, the support provided by both spouses is considered whether the spouses file a joint return or separate returns if the spouses agree in writing which spouse may claim an exemption for a dependent. If the spouses file separate returns on the same form, a separate written agreement is not required. If spouses file separate returns on separate forms and do not agree in writing which spouse may claim a dependent exemption for an individual, a dependent exemption may be claimed only by the spouse, if either, who provided over half the individual's total support. By filing a separate return claiming a dependent exemption for an individual, a married taxpayer represents, as applicable, either that both spouses have together provided over half of the individual's total support and the spouses have agreed in writing the taxpayer may claim an exemption for the dependent or that the individual for whom the taxpayer is claiming a dependent exemption has received over half of their total support from the taxpayer alone. The agreement by spouses filing separate returns is a tax record the taxpayer must retain and provide the department on request.

(b) If a decree of divorce or legal separation, or a binding written agreement between legally separated spouses or divorced former spouses, provides that the taxpayer may claim, and the other parent will not claim, a dependent exemption for a child for state income tax purposes, the taxpayer is treated as having provided over half of the child's support for Montana income tax purposes. If the taxpayer entitled to claim a dependent exemption under this rule is remarried, the taxpayer may claim the exemption on a joint return or, as provided in (4)(a), the taxpayer or taxpayer's spouse may claim the exemption.

(1) Each taxpayer is allowed one personal exemption for himself or herself. If the taxpayer is age 65 or older by the close of their tax year, they are entitled to an additional personal exemption. If the taxpayer is blind, as provided in 15-30-2114, MCA, at the close of their tax year, they are entitled to an additional personal exemption. The additional exemptions are cumulative and a taxpayer who is at least 65 years old and blind by the close of the tax year is allowed three personal exemptions.

(2) The following provisions apply to the personal exemptions of married persons:

(a) a married taxpayer filing a separate return whose spouse, for the calendar year in which the tax year of the taxpayer begins, has no gross income and is not a dependent of another taxpayer, is allowed the following additional personal exemptions:

(i) one additional exemption for their spouse;

(ii) another additional exemption if their spouse is 65 years or older at the close of the taxpayer's tax year; and

(iii) another additional exemption if their spouse is blind at the close the taxpayer's tax year or, if the spouse dies before the end of the tax year, is blind at the spouse's date of death;

(b) as provided in (1), married taxpayers filing a joint return are allowed two personal exemptions in computing their joint taxable income; and

(c) if a joint return is made by married taxpayers, no other person may claim an exemption for either spouse even if the spouse is the other person's dependent for whom a dependent exemption would otherwise be allowed as provided in ARM 42.15.403.

(3) An individual attains the age of 65 on the first moment of the day preceding their 65th birthday. Accordingly, a person whose birthday falls on January 1 attains the age of 65 on December 31 of the immediately preceding calendar year.

(4) The amount allowed as a personal exemption is as follows:

(a) For all tax years, the amount of the personal exemption, as adjusted for inflation for recent tax years, can be obtained by accessing past-year downloadable tax forms from the department's internet homepage web site located at: revenue.mt.gov; and

(b) for tax years beginning after December 31, 2004, the personal exemption is $1,900, adjusted annually for inflation by November 1 of each year as provided in 15-30-2114, MCA (effective January 1, 2005).

(1) Except as provided in (2), a taxpayer is allowed a dependent exemption for each dependent who receives over half of his or her total support from the taxpayer. This support test must be implemented like the support test in 152(d)(1)(C) of the Internal Revenue Code (IRC), and all related U.S. Treasury Department regulations about qualifying relatives.

(2) A dependent exemption is not allowed for an individual described in (1):

(a) who, during the calendar year, has gross income of more than the exemption amount allowed under 15-30-2114, MCA; unless the individual is the taxpayer's "qualifying child," as defined in section 152 of the IRC, and meets the support test for "qualifying child" under 152(c)(1)(D), of the IRC;

(b) who makes a joint return with their spouse for the same tax year or for a tax year that begins in the calendar year in which the tax year of the taxpayer begins; or

(c) for whom an exemption for a dependent child with a disability is claimed as provided in (3).

(3) In lieu of the dependent exemption described in (1), a taxpayer is allowed an exemption equal in amount to twice the dependent exemption for a qualifying dependent child with disability.

(a) A child, meaning an individual whose relationship to the taxpayer conforms with the requirements in 152(C)(2) of the IRC, qualifies as a dependent child with disability for the purpose of applying 15-30-214, MCA, if:

(i) the child receives over half of his or her support from the taxpayer, as in (1);

(ii) the taxpayer's home is the dependent disabled child's principal place of abode, as determined by 152(c)(1)(B) of the IRC and related U.S. Treasury Department regulations; and

(iii) a licensed physician has certified that the dependent child has a permanent disability constituting 50 percent or more of the body as a whole.

(b) The taxpayer must provide the physician's certification with the first tax return on which they claim the disabled child exemption. If the taxpayer files electronically, and is unable to attach the certification to the electronic filing, it must be mailed to:

Department of Revenue

P.O. Box 5805

Helena, MT 59604-5805.

An exemption for dependent child with disability may be disallowed if the department has not received a copy of the physician's certification.

(c) To the extent the child continues to qualify as a dependent with disability, the taxpayer does not need to provide documentation with succeeding returns.

(d) The taxpayer must inform the department, in writing, of any change in the child's eligibility for this exemption, to be mailed to the address provided in (b). Any year the taxpayer does not claim this exemption on the return would satisfy this written obligation.

(e) In the instance that a child was no longer eligible for at least one year, and regains eligibility, the taxpayer must comply with the requirements in (b) with a new certification for the year the child qualifies again.

(f) If, as of January 1, 2019, the taxpayer has not joined the physician's certification with a prior year's return, and the child has continuously been eligible, the taxpayer must keep the certification in their records to be provided to the department upon request.

(g) The dependent disabled child exemption may be claimed for a qualifying disabled child of any age.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

(a) a complete description of all items donated;

(b) a statement of the fair market value of each item donated;

(c) the date of manufacture for each item donated;

(d) the date the software was developed; and

(e) a copy of the written statement from the donee in which the donee agrees to accept the property and represents that the property will not be transferred by the donee in exchange for money, other property, or services.

(2) For the purposes of the deduction allowed by 15-31-172, MCA, apparatus intended for use with the computer shall include, but not be limited to, software provided that the software was not developed more than five years prior to the date of its donation to a school.

(2) The taxpayer may claim more than one deduction as a result of sales to beginning farmers provided each sale is approved by the agricultural loan authority.

(3) To the extent that a net operating loss is created as a result of this deduction, such loss shall not be available for carryover or carryback provisions.

(4) Individuals in a partnership that makes an approved sale are also allowed this deduction. The partners' distributive shares of profit may be reduced by the amount of the allowable deductions. However, in no case shall the total deduction for all partners exceed $50,000 for each sale.

(5) Shareholders of an electing small business corporation are not allowed a deduction on their individual tax returns for approved sales made by the corporation. The deduction must be taken by the corporation.

(6) For tax deduction purposes, a copy of the approval of the transaction by the agricultural loan authority must be attached to the return claiming the deduction. The department may also require additional documentation on request to establish the eligibility of the transaction for a tax deduction.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been repealed.

This rule has been repealed.

This rule has been transferred.

(a) full-time, part-time or temporary employment where both of the spouses are employed at the same time.

(b) full-time, part-time or temporary employment where one of the spouses is employed and the other is unable to care for himself/herself because of physical or mental illness.

(2) Household and dependent care expenses are employment related expenses for the periods of time in a day a taxpayer is gainfully employed.

This rule has been repealed.

This rule has been repealed.

This rule has been transferred.

This rule has been transferred.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

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This rule has been transferred.

This rule has been transferred.

This rule has been repealed.

This rule has been repealed.

This rule has been transferred.

This rule has been repealed.

This rule has been transferred.

This rule has been transferred.

(1) "Nonbusiness deduction" has the same meaning as nonbusiness deduction for federal income tax purposes when computing a net operating loss and includes the following Montana items:

(a) the standard deduction provided in 15-30-2132, MCA;

(b) the deduction for federal income taxes provided in 15-30-2131, MCA, to the extent not attributable to business profits;

(c) the deduction for political contributions provided in 15-30-2131, MCA;

(d) the part of the deduction for expenses for organic and byproduct inorganic fertilizer provided in 15-30-2131, MCA, that is not a trade or business expense;

(e) the deduction for payments for premiums for medical care and for premiums and certificates for long-term care provided in 15-30-2131, MCA;

(f) the deduction for a light vehicle registration fee provided in 15-30-2131, MCA, if it is not a trade or business expense;

(g) the deduction for the patriotic license plate surcharge provided in 15-30-2142, MCA, if it is not a trade or business expense;

(h) the deduction for per capita livestock fees if they are not trade or business expenses; and

(i) the deductions for charitable contributions, including contributions to the child abuse and neglect prevention program provided in 15-30-2131 and 15-30-2143, MCA, donations of computer equipment to schools by small business corporations provided in 15-31-172, MCA, and donations to the veterans' services account or the state veterans' cemetery program provided in 15-30-2142, MCA.

(2) "Nonbusiness income" has the same meaning as nonbusiness income for federal income tax purposes when computing a net operating loss and includes the following Montana items:

(a) interest on the obligations of another state or territory and mutual fund dividends attributable to the interest;

(b) federal income tax refunds and other recoveries of nonbusiness deductions in a prior tax year that reduced Montana income tax;

(c) income attributable to the unqualified withdrawals from medical savings accounts provided in 15-61-203, MCA, and the unqualified withdrawals from first-time home buyer savings accounts provided in 15-63-203, MCA; and

(d) decrease in the federal charitable contribution deduction attributable to claiming a charitable endowment tax credit.

This rule has been transferred.

This rule has been repealed.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been repealed.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

(1) Except as provided in (3) and (4), a taxpayer who does not claim itemized deductions is allowed the standard deduction.

(2) The standard deduction is 20% of the taxpayer's Montana adjusted gross income subject to minimum and maximum amounts, which are adjusted annually for inflation. The amount of the standard deduction, as adjusted for inflation for recent tax years, can be obtained by accessing past-year downloadable tax forms from the department's internet homepage web site located at: revenue.mt.gov.

(3) The following requirements govern the standard deduction of married taxpayers who do not file a joint return with their spouse:

(a) A married taxpayer filing separately may claim the standard deduction only if his or her spouse does not file a Montana individual income tax return claiming itemized deductions;

(b) As provided in 15-30-2113, MCA, a taxpayer who is legally separated from his or her spouse at the end of the tax year under a decree of divorce, legal separation, or separate maintenance is not considered married for purposes of this rule;

(c) In the event of death of one of the spouses, the restriction described in (3)(a) is applicable with respect to the tax year ending with death and the tax year of the surviving spouse in which the death occurs; and

(d) By filing a separate return claiming a standard deduction, a married taxpayer represents that the taxpayer's spouse did not or will not claim itemized deductions.

(4) A standard deduction may not be claimed for an estate or trust.

(1) If one spouse files separately and itemizes deductions, then both must do so.

(2) An itemized deduction of a married taxpayer who files a separate federal income tax return claiming the itemized deduction may not be claimed as an itemized deduction by the taxpayer's spouse.

(3) If a married taxpayer files a separate Montana return, the following rules apply if the taxpayer filed a joint federal income tax return with the taxpayer's spouse or did not file a federal income tax return:

(a) an itemized deduction clearly attributable to one spouse may be claimed only by the spouse to whom it is attributable; and

(b) if the spouses file a separate return on the same form, an itemized deduction not clearly attributable to one spouse may be divided as provided on the form;

(c) if one or both of the spouses files a separate return on a separate form, an itemized deduction not clearly attributable to one spouse must be divided equally unless the spouses enter into a binding written agreement providing a different division;

(d) the agreement described in (3)(c) is a tax record each spouse must retain and provide to the department on request.

(4) Except as provided in 15-30-2110, MCA, ARM 42.15.206 and (5), if a taxpayer files a Montana return claiming an itemized deduction that is allowed only to taxpayers claiming a specific federal filing status, the deduction is disallowed unless the taxpayer files their Montana income tax return using the same status.

(5) Married taxpayers who file separate Montana returns and are allowed a deduction for mortgage insurance premiums IRC, 26 U.S.C. 163, are allowed the same deduction calculated using the federal rules for married taxpayers filing a joint return.

(1) Except as provided in (2), when the deductions allowed under 15-30-2131, MCA, are limited to a percent of adjusted gross income by reference to the IRC, Montana adjusted gross income must be used when calculating the deductions limitation for the Montana return. Montana adjusted gross income is defined in 15-30-2110, MCA.

(2) Taxpayers who are allowed a deduction for mortgage insurance premiums paid under IRC, 26 U.S.C. 163, may use their federal adjusted gross income when computing the allowable amount for the Montana return.

(1) Tax deductible administrative costs as provided by 15-30-2141 and 15-31-117, MCA, are limited to those that are allowable under the Internal Revenue Code and are ordinary and necessary costs directly connected with or pertaining to the management or maintenance of the principal of the fund.

(2) Administrative costs are tax deductible by:

(a) a cash basis taxpayer in the year they are paid; or

(b) an accrual basis taxpayer in the tax year in which the accrual is made.

(3) Contributions to and administrative costs of an independent liability fund shall be reductions of income in arriving at Montana adjusted gross income.

(4) Upon termination of the independent liability fund the trustee shall file with the department a copy of the federal Form 1099. The returns must provide the amount of any distribution, to whom the distribution was made, and the calendar year of the distribution for any distribution made from the principal or income of the fund.

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(1) The deduction provided under Internal Revenue Code Section 199A is not allowed for the determination of Montana net income.

(1) Every account administrator except a self-administered account holder is required to register on a form provided by the department.

(2) The registration form must contain:

(a) the name, address, identification number of the entity and the names of the owners or officers for a business; or

(b) the name, address, and social security number for a sole proprietorship or partnership.

(3) The account administrator number will be:

(a) the federal employer identification number for a business; and

(b) the social security number of the owner for a sole proprietor or partnership.

(4) Nonregistration does not relieve an account administrator from being responsible for reporting, withholding, and the remitting of penalties.

(5) Each registered account administrator may be assigned an identification number by the department.

(6) Nothing in these rules should be construed as to exempt an account administrator from the applicable requirements of Title 33, MCA.

(1) A Montana medical care savings account (MSA) is subject to the following requirements:

(a) The MSA must have a unique account holder who is an individual and a resident of Montana. A jointly held account does not qualify. Regardless of income tax filing status, married taxpayers must each open an account to register as an account holder to be eligible to reduce their federal adjusted gross income by the amount of their allowable contributions.

(b) Annual interest or income earned in a Montana MSA is excluded from Montana adjusted gross income as long as it remains as a deposit in the account, is withdrawn from the account to pay for eligible medical expenses, is distributed to an immediate family member as provided in 15-61-202, MCA, or is used for paying the expenses of administering the account. Year-end interest or other income reports provided to the taxing authorities and the account holder must be provided in such a manner that the interest or other income earned on the Montana MSA can be separately identified in order to remain exempt.

(c) A taxpayer who used a loss in the value of the investment contained in the MSA as a reduction of their federal adjusted gross income, must add this loss back to the federal adjusted gross income for the determination of the Montana taxable income.

(d) Beginning January 1, 2018, an account holder cannot contribute in excess of the contribution limit stated in 15-61-202, MCA. During the 2018 calendar year only, any contribution made before January 1, 2018, in excess of the principal, which is the sum of contributions deducted from adjusted gross income in all preceding tax years, can be used as deductible contribution, as eligible expenses, or withdrawn free of tax and penalties. After December 31, 2018, an account holder cannot exclude from adjusted gross income any contribution in excess of the principal remaining in the MSA, and all unqualified withdrawals must be taxed as ordinary income and subject to the penalty as provided in 15-61-203, MCA.

(e) Before receiving any exempted transfer of funds from a Montana MSA of an immediate family member, a transferee must establish his or her own account, provided he or she is eligible to be an account holder of a Montana MSA.

(2) Every account holder of a self-administered account, or account administrator, is required to annually submit the following information regarding each MSA:

(a) name of the account holder;

(b) address of the account holder;

(c) taxpayer identification number of the account holder;

(d) starting and ending balances of the account;

(e) contributions made during the tax year by the account holder;

(f) amount of withdrawals made during the tax year by the account holder;

(g) dates of any withdrawals;

(h) interest or other income earned on the principal of the MSA; and

(i) amount of penalties withheld and remitted.

(3) Each individual account holder of a self-administered account must file the information required in (2) on forms provided by or authorized by the department and be remitted with the individual income tax form for the corresponding tax year. The account holder must report the name and address where the account is established, and the account number, annually.

(4) On or before January 31, an account administrator, other than an account holder, must file the information required under (2) on forms provided by or authorized by the department.

(5) Account holders or account administrators who withhold penalties on unqualified withdrawals must submit the penalties to the department as follows:

(a) Account administrators must remit the penalties on or before January 31 of the following year to the department.

(b) Self-administered individual account holders must report and remit penalties with the individual income tax form for the corresponding tax year.

(6) Failure to remit any withheld penalties within the time provided is considered to be an unlawful conversion of trust money. Penalties provided in 15-1-216 and 15-30-2641, MCA, apply to any violation of the requirement to collect, truthfully account for, and pay amounts required to be withheld from ineligible withdrawals of the account holder.

(1) The funds held in a Montana medical care savings account (MSA) may be withdrawn by the account holder free of tax at any time during the year if they are qualified withdrawals.

(2) Except as provided in (7), qualified withdrawals include:

(a) eligible medical expenses, as defined in 15-61-102, MCA, paid during that year; or

(b) expenses incurred for administering the account.

(3) An unqualified withdrawal must be:

(a) included in the taxpayer's income tax return as ordinary income; and

(b) is subject to a penalty equal to 10 percent of the amount of the withdrawal from the account. An unqualified withdrawal made on the last business day of the business year, as set forth in 15-61-203, MCA, is not subject to this penalty but shall be taxed as ordinary income as provided in (a).

(4) Withdrawals that do not meet the following requirements and exceptions are deemed unqualified:

(a) Withdrawals must be made by the account holder of a self-administered account, or on behalf of an account holder, by January 15 for the purpose of reimbursing eligible medical expenses paid during the previous year.

(b) Each account holder must maintain documentation of eligible expenses for a minimum of three years from the date the account holder filed a Montana income tax return for the year the expenses were incurred.

(c) In the case of requests made by account holders from account administrators for withdrawals to pay for eligible medical expenses, the expenses must be supported by an itemized statement of expenses that were either paid or charged by the account holder and the signature of the account holder attesting that these expenses are "eligible medical expenses." The burden of proving that a withdrawal from an MSA was made for an eligible expense is upon the account holder and not upon the account administrator.

(d) All payments made from an MSA must be made payable to the account holder, the eligible medical provider, the estate, or the legal guardian of the account holder, unless an agreement exists between the account holder and/or the account administrator and the payee to pay eligible medical expenses electronically.

(5) An account holder who becomes a resident of another state is deemed to have made an unqualified withdrawal for the entire value of the balance contained in the account on the date the individual changed residency. The withdrawal is deemed to have been made on the last business day of the taxpayer's Montana residency, and is not subject to the 10 percent penalty provided in 15-61-206, MCA.

(6) The direct transfer of funds from a Montana MSA of an account holder to another Montana MSA is deemed an unqualified withdrawal to the transferor and ordinary income to the transferee, to the extent it is includable in the transferee's federal gross income, except when the funds are directly transferred to:

(a) another Montana MSA of the same account holder established to replace the initial one or with a different account administrator; or

(b) a Montana MSA held by an immediate family member of the account holder, to the extent it is not includable in the transferee's federal gross income.

(7) After the death of the account holder:

(a) any distribution or withdrawal of funds from the Montana MSA is deemed an unqualified withdrawal unless:

(i) the funds are distributed as an inherited account; or

(ii) the withdrawals are made during the 365 days following the death of the account owner, either by the estate of the deceased on an existing account, or by any account holder of an inherited account to pay for eligible expenses incurred by the deceased;

(b) inherited accounts are deductible from Montana adjusted gross income to the extent they are included in the federal adjusted gross income; and

(c) the 10 percent penalty for unqualified withdrawals does not apply to any distribution of funds to the heirs of the deceased whether or not the funds received qualify as an inherited account.

(8) Qualified withdrawals made with respect to a family leave expense, as defined in 15-61-102, MCA, are deemed to be in exchange of adequate consideration for loss of income and must be treated as ordinary income to the recipient, except when received by the account holder or the spouse of the account holder.

(9) All medical records and expenses provided by an account holder to an account administrator are to be kept confidential by the account administrator unless the account holder gives authorization to disclose them to a third party.

(1) If a corporate account administrator, limited liability company, or a limited partnership fails to withhold or fails to remit any penalties withheld to the department as required, the officers and owners are individually responsible for the penalties. A financial institution is not responsible for analyzing the eligibility of the expenses if the account holder attests that the withdrawals are for eligible medical expenses.

(2) Each account holder is individually responsible for withholding and remitting penalties.

(3) In the case of a bankruptcy by an account administrator, the liability for penalties remains unaffected, and the individual or owner remains liable for the amount of penalties withheld but not paid.

The following definitions apply to this subchapter:

(1) "Account administrator" means, in addition to the definition found in 15-61-102, MCA, any person, partnership, limited liability company, limited liability partnership, or corporation that acts as a third-party fiduciary to administer a medical care savings account and is either a bank, savings and loan, credit union, or trust company, a health care insurer, a certified public accountant, or an employer who is self-insured under ERISA.

(2) "Child" means a son, stepson, daughter, stepdaughter, or legally adopted son or daughter of the taxpayer.

(3) "Direct transfer" means a withdrawal of all or part of a Montana medical care savings account (MSA) that is deposited in its entirely by means of an electronic bank transfer or by means of check into another Montana MSA.

(4) "Last business day" means the last day of the account administrator's business year.

(5) "Inherited account" means funds coming from a Montana medical care savings account (MSA) of a deceased individual, inherited by an immediate family member and contributed to the heir's Montana MSA upon distribution of the estate or as pay-on-death beneficiary of the account.

(6) "Self-administered" means accounts that are administered by the account holder for their own benefit.

This rule has been transferred.

This rule has been transferred.

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This rule has been transferred.

This rule has been transferred.

This rule has been repealed.

This rule has been repealed.

(1) The program administrator determines who can be an account owner and from whom it will accept contributions to an account. Account ownership and the acceptance of contributions are not related to the ability of the contributor to reduce Montana taxable income. Entitlement to the deduction depends on meeting specific statutory requirements set forth in Title 15, chapter 62, MCA, and these rules.

(2) An individual, including a nonresident, may reduce their Montana adjusted gross income by the lesser of the total contributions they actually make to one or more accounts as provided in 15-30-2110 and 15-62-207, MCA, during the tax year, or $3,000.

(3) A rollover from one account to another or from one program to another state program is not a contribution for which a deduction may be claimed.

(4) For Montana tax purposes, deductible contributions to an account do not include the earnings on the account.

(1) A taxpayer is allowed to deduct the lesser of the total contributions actually made to one or more Montana family education savings accounts during the tax year, or $3,000. A deduction is allowed only for contributions to accounts owned by the taxpayer, the taxpayer's spouse, or, if the taxpayer's child or stepchild is a Montana resident, the taxpayer's child or stepchild.

(2) For purposes of the $3,000 reduction to Montana adjusted gross income, contributions must be made to a Montana family education savings account. Contributions made to other state or private family education savings accounts do not qualify for the Montana reduction to income.

(3) For Montana tax purposes, deductible contributions to a family education savings account do not include the earnings on the account.

(1) Penalties assessed for nonqualified withdrawals are not deductible in arriving at Montana taxable income.

(2) A rollover from one account to another or to an ABLE account is allowed under the same terms described under IRC 529. However, if the funds are rolled over to an account owned by an individual who is not a resident of Montana, then the amount rolled over is a recapturable withdrawal, which is defined in 15-62-208, MCA.

(3) A recapture tax at a rate equal to the highest rate of tax provided in 15-30-2103, MCA, is imposed on the recapturable withdrawal of contributions to a family education savings account deducted by the contributor. Except as provided in (10), the recapture tax is payable by the owner of the account from which the withdrawal was made even if the account owner did not make the deductible contribution. The account owner is liable for the tax even if the account owner is not a Montana resident at the time of the withdrawal.

(4) An account owner who is subject to the recapture tax must report the tax on the tax return for the taxable year of the withdrawal and must pay the tax at the time the income tax for such year is due.

(5) The portion of a recapturable withdrawal that is not treated as the withdrawal of earnings shall be treated as:

(a) first, out of nondeductible contributions not previously withdrawn; and

(b) second, out of deductible contributions not previously withdrawn.

(6) The portion of any other withdrawal that is not treated as the withdrawal of earnings shall be treated as:

(a) first, out of deductible contributions not previously withdrawn; and

(b) second, out of nondeductible contributions not previously withdrawn.

(7) The taxpayer shall have the burden of sustaining a claim that all or a portion of the contributions withdrawn were not attributable to deductible contributions. There shall be a presumption that a recapturable withdrawal is a withdrawal of deductible contributions.

(8) A recapturable withdrawal of amounts that previously reduced Montana adjusted gross income under 15-30-2110(11), MCA, is Montana source income pursuant to 15-30-2101(18)(a)(xvi), MCA.

(9) Nonresidents are subject to the recapture tax under ARM 42.15.803 and 42.15.804.

(10) If the account is established under the Montana Uniform Transfers to Minors Act, and the minor is not yet 21 years of age, the custodian of that account is subject to any recapture tax on a recapturable withdrawal.

(1) Each program manager shall submit a report to the department via the state of Montana's secure file transfer service (or functional equivalent), by February 28 following the close of the preceding tax year which identifies all contributions and withdrawals for family education savings accounts for which the account owner is, or was at the time the account was opened, a Montana resident. The report must be submitted in an electronic format sortable by the following information for each contributor, designated beneficiary, account owner, and distributee:

(a) full name;

(b) last reported address;

(c) social security number;

(d) amount of the contributions;

(e) amount of the withdrawals (and to the extent that the Internal Revenue Service requires such information with respect to withdrawals, the portion constituting contributions and the portion constituting earnings); and

(f) in the case of the account owner, a notation as to whether the distribution is an early or nonqualified withdrawal.

(2) At the request of the department, a program manager shall provide complete copies of any other reports about accounts that it provides to either the Internal Revenue Service or the Montana Board of Regents. 

(3) A program manager shall report a withdrawal as an early withdrawal if the withdrawal is made within one year of the date that the account was opened.

(4) A program manager shall withhold the recapture tax from any recapturable withdrawal from an account that was at any time owned by a resident of Montana but that at the time of the withdrawal is not owned by a person who is a resident of Montana. For purposes of this provision, the program manager shall assume that the account owner's address is the last address that the account owner reported to the program manager.

(5) Any recapture tax that is withheld shall be paid to the department not later than the last day of the month following the month in which such withholding occurred. A program manager shall have no liability to the department for failure to withhold recapture tax if such error was made in good faith.

(6) A taxpayer who makes a recapturable withdrawal, for which withholding would be required, may petition the department in writing to determine the amount of the recapture tax. The petition shall include all facts relevant to the proposed withdrawal, including information about the account and other accounts owned by the taxpayer and evidence to show that all or a portion of the contributions are not attributable to previously deducted contributions. If the department is satisfied with the evidence, it shall issue a letter determining the recapture tax to be withheld by the program manager.

(7) Nothing in statute or rule prevents the department from directly contacting the contributor, designated beneficiary, account owner, or distributee for the reporting information described herein.  

In addition to the terms defined in 15-62-103, MCA, the following definitions also apply to terms used in this subchapter:

(1) "Act" means the Family Education Savings Act, as referenced in 15-62-101, MCA.

(2) "Child" means a son, stepson, daughter, stepdaughter, or legally adopted son or daughter of the taxpayer.

(3) "Distributee" means the account owner or designated beneficiary who withdraws the funds. If the account is established under the Montana Uniform Transfers to Minors Act, and the minor is not yet 21 years of age, the distributee is the custodian of that account.

(4) "Program" means the family education savings program established pursuant to the Act, or any other program established and maintained under another state that qualifies as a qualified tuition program under IRC 529.

(5) "Program manager" means a financial institution selected pursuant to 15-62-203, MCA.

(1) Earnings on family education savings program accounts are not included in Montana adjusted gross income when earned. The earnings will be included in Montana adjusted gross income when distributed to the extent they are not used to pay for qualified education expenses.

(1) For purposes of determining whether a contribution should be considered for one tax year or another, the date of mailing will be determinative. A certificate of mailing issued by the post office will be evidence of the date of mailing.

This rule has been repealed.

The following definitions apply to this subchapter:

(1) "Montana Form FTB" means the Montana first-time home buyer's savings account form containing annual reporting information for self-administered individual accounts.

(2) "Self-administered account holder" is synonymous with that of an account holder as defined in 15-63-102, MCA, but a self-administered account holder may also be an account administrator. For purposes of these rules, the term may be used in place of account administrator.

(1) Every account administrator, except a self-administered account holder, is required to register with the department.

(2) The registration does not need to be in a specific format but it must contain the following information:

(a) the name, address, identification number of the entity, and the names of the owners or officers for a business; or

(b) the name, address, and social security number for a sole proprietorship or partnership.

(3) The account administrator number will be:

(a) the federal employer identification number for a business; and

(b) the social security number of the owner for a sole proprietor or partnership.

(4) Nonregistration does not relieve an account administrator from being responsible for reporting, withholding, and remitting penalties.

(1) Every self-administered account holder or account administrator is required to annually submit the following information regarding each account:

(a) name of the account holder;

(b) address of the account holder;

(c) taxpayer identification number of the account holder;

(d) deposits made during the tax year by the account holder;

(e) amount of withdrawals made during the tax year by the account holder;

(f) dates of any withdrawals;

(g) interest or other income earned on the principal and excess contributions of the account; and

(h) amount of penalties withheld and remitted.

(2) The self-administered account holder must also include the name and address of where the account is established and the account number.

(3) Both the contributions and any interest, or other income, earned on the account are to be segregated by the self-administered account holder or account administrator from all other accounts.

(4) Each self-administered individual account holder must establish a separate account with a financial or other approved institution. The account must be segregated from all other accounts.

(5) Any year-end reporting of interest, or other income, earned to the taxing authorities and to the account holder of interest, or other income earned must be done so that any interest, or other income earned on that account could be separately identified.

(6) For the purpose of determining the amount of interest, or other income, earned on the principal which is excluded from Montana adjusted gross income, when interest or other income earned is on principal and excess contribution, the provisions of ARM 42.15.906 apply.

(7) On or before January 31, an account administrator other than a self-administered account holder must file the information required under (1) on forms provided by or authorized by the department.

(8) Each self-administered account holder must file the information required in (1) either on a Montana Form FTB provided by the department or any means available, so long as the necessary information is provided and remitted with the individual income tax form for the corresponding tax year.

(9) Self-administered account holders or account administrators who withhold penalties on monies used for items other than eligible expenses must submit the penalties to the department.

(a) Account administrators, other than self-administered account holders, must remit the penalties monthly by the 15th day of the following month when the total amount of penalties exceeds $500.

(b) Account administrators, other than self-administered account holders, whose total penalties withheld during the calendar year are less than $500 must remit the penalties on or before January 31 of the following year to the department.

(c) Self-administered account holders must complete and file Montana Form FTB and remit the penalty shown on Montana Form FTB with the individual income tax return (Montana Form 2).

(10) Failure to remit any withheld penalties within the time provided is considered to be an unlawful conversion of trust money. Penalties provided in 15-1-216 and 15-30-2641, MCA, apply to any violation of the requirement to collect, truthfully account for, and pay amounts required to be withheld from ineligible withdrawals of the account holder.

(1) The funds held in an account may be withdrawn by the account holder at any time for eligible expenses. Withdrawals for the purpose of paying eligible expenses shall not be subject to the 10% penalty.

(2) Withdrawals to pay for eligible costs must be supported by an itemized statement of the down payment and allowable closing costs that were paid by the account holder. The account holder must sign the statement attesting that these expenses are eligible costs.

(3) The burden of proving that the withdrawal from a savings account was made for eligible costs is upon the account holder and not upon the account administrator. Each account holder must maintain documentation of eligible costs.

(4) There shall be a penalty for withdrawal of funds by the account holder for purposes other than the payment of eligible costs except upon the death of the account holder. The penalty shall be 10% of the amount of the withdrawal from the account and, in addition, the amount withdrawn shall be taxed as ordinary income in the year the funds are withdrawn for non-eligible costs.

(5) The direct transfer of funds from a savings account to a savings account with a different account administrator shall not be considered a withdrawal for purposes of this rule. A direct transfer is when monies in an account are transferred to a new account without the beneficiary or account holder receiving any funds.

(2) A financial institution is not responsible for analyzing the eligibility of the expenses if the account holder attests that the withdrawal is made for eligible costs.

(3) Each self-administered account holder is individually responsible for remitting the penalties as stated in ARM 42.15.903.

(4) In the case of a bankruptcy by an account administrator, the liability for the penalties remain unaffected and the individual or owners remains liable for the amount of penalties withheld but unpaid.

(1) An account holder who remains a "first-time home buyer" may deposit into an account more than the maximum exclusion allowed under 15-63-202, MCA, in any given tax year and may exclude from subsequent years any amounts previously deposited and not deducted as principal in a prior year.

(2) Once an individual purchases a single-family residence, the individual no longer is considered an account holder and a first-time home buyer. In subsequent years, the individual is not entitled to exclude amounts deposited into a first-time home buyer savings account or amounts previously deposited but not yet excluded from the account holder's adjusted gross income.

(3) Interest or other income earned on the principal is excluded from Montana adjusted gross income. Interest on other income on excess contributions, which have not yet been classified as principal, is not exempt in the years the interest or other income is earned.

(4) The amounts deposited into a first-time home buyer savings account is not considered principal until the year it is excluded from adjusted gross income pursuant to 15-30-2110, MCA. For example, if a single individual who has never owned a home transfers $15,000 from an existing savings account into a first-time home buyer account in year one and purchases a qualifying home at the end of December in year three, the effect on their Montana returns will be as follows:

(a) For year one, the individual reduces their state income by $3,000 plus $90 in interest earned on the $3,000 principal only ($90 at the rate of 3% of the $3,000 principal). The remaining interest ($360 at the rate of 3% of the $12,000 carryover amount) is taxable in year one.

(b) In year two, the single individual is allowed a $3,000 carryover reduction plus interest earned on $6,090 ($183 at the rate of 3% of the $6,000 principal) for a total of $3,183 reduction on the state income tax return. The remaining interest ($281 at the rate of 3% of the $9,360 carryover amount) is taxable in year two.

(c) At the end of December in year three, the single individual buys a qualifying home. The individual is permitted the $3,000 carryover reduction on the Montana income tax for year three plus interest earned to the date of purchase ($278 at the rate of 3% on $9,273) for a total of $9,551. The taxpayer must spend at least $9,551 for eligible first-time home buyer expenses. The amount includes $9,000 that qualifies for the reduction ($3,000 for year one; $3,000 for year two; $3,000 for year three) plus the tax deferred interest for $551 earned during year one, year two, and year three.

(d) Once the taxpayer purchases the home, the taxpayer can no longer claim the carryover reduction for the portion of the $15,000 ($6,000 plus interest) that the taxpayer did not claim as a reduction in prior years.

(1) A resident account holder who subsequently becomes a nonresident and who has established a Montana first-time home buyer account while a resident and excluded income from Montana adjusted gross income in prior years is not entitled to a qualified withdrawal for the purchase of a single-family residence outside the state of Montana.

(2) A non-resident who files a final tax return in Montana must report, as income in the final year of residency, the amount of principal and interest previously excluded from adjusted gross income. This amount is considered a non-qualified withdrawal and subject to the 10% penalty provided in 15-63-203 , MCA, unless withdrawn on the last business day of the account holder's business year.

The following definitions apply to terms used in this subchapter:

(1) "ABLE account" or "account" mean the same as "account," which is defined in 53-25-103, MCA.

(2) "Achieving a better life experience (ABLE) program" or "program" means the same as "program," which is defined in 53-25-103, MCA.

(3) "Contributor" means the same as the term is defined in 53-25-103, MCA, and includes the individuals listed in ARM 42.15.1002 that have contributed to one or more accounts established under the Montana ABLE program or to a qualified program established by another state, and are eligible for a deduction to adjusted gross income under 15-30-2110(12), MCA.

(1) In addition to the individuals listed in 15-30-2110(12), MCA, the following contributors identified in 53-25-117, MCA, are also allowed a deduction from Montana adjusted gross income for a contribution made to an ABLE account:

(a) the designated beneficiary;

(b) the spouse of the designated beneficiary; or

(c) a parent, grandparent, sibling, or child related to the designated beneficiary by blood, marriage, or legal adoption.

(2) The deduction provided under 15-30-2110(12), MCA, for contributions to an ABLE account is available to resident and nonresident individuals. If a nonresident individual contributes to an account, the deduction is only allowed if the designated beneficiary is the nonresident's child or stepchild and is also a Montana resident.

(3) A contributor must provide a written report to the designated beneficiary or agent, by the end of the tax year in which the contribution is made to an ABLE account, detailing the amount of the contributions that will reduce adjusted gross income for that tax year.

(1) There is a recapture tax, payable by a designated beneficiary, regardless of residency status, on recapturable withdrawals from an ABLE account. Recapturable withdrawals and the amount of the recapture tax are provided in 53-25-118, MCA.

(2) A recapturable withdrawal of amounts that previously reduced a contributor's Montana adjusted gross income under 15-30-2110(12), MCA, is Montana source income to the designated beneficiary in the year of the recapturable withdrawal, as described in 15-30-2101(18)(a)(xvi), MCA.

(3) The recapture tax must be determined and withheld by the designated beneficiary or agent and reported to the department based on the recapturable withdrawal that occurred and the report detailing the contributions as required in ARM 42.15.1002(3). The designated beneficiary or agent must maintain records showing the reported contributions and withdrawals.

(4) The agent shall withhold and remit the recapture tax on a Montana individual income tax return for the tax year of the withdrawal if the recapturable withdrawal occurred from an account for which the designated beneficiary is no longer a resident of Montana.

(1) Each program manager shall submit a report to the department via the state of Montana's secure file transfer service (or functional equivalent), by February 28 following the close of the preceding tax year which identifies all contributions and withdrawals for ABLE accounts of Montana resident designated beneficiaries. The report must also include contributions made to accounts of designated beneficiaries who were residents at the time the account was opened.

(2) The report must be in an electronic format sortable by the following contributor and designated beneficiary information:

(a) full name;

(b) last reported address;

(c) social security number;

(d) amount of the contributions;

(e) amount of the withdrawals (and to the extent that the Internal Revenue Service requires such information with respect to withdrawals, the portion constituting contributions and the portion constituting earnings); and

(f) a notation as to whether a distribution is a recapturable withdrawal, and if the withdrawal is made in violation of IRC 592A, when applicable.

(3) At the request of the department, a program manager shall provide complete copies of any other reports about accounts that it provides to either the Internal Revenue Service or to the Montana Department of Public Health and Human Services.

(4) Nothing in statute or rule prevents the department from directly contacting the contributor, designated beneficiary, or agent for the reporting information described herein.