42.15.108    DETERMINING TAX LIABILITY

(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.   

History: 15-30-2620, MCA; IMP, 15-30-2101, 15-30-2102, 15-30-2103, 15-30-2104, 15-30-2110, 15-30-2114, 15-30-2131, 15-30-2153, MCA; NEW, 2004 MAR p. 3147, Eff. 12/17/04; AMD, 2008 MAR p. 178, Eff. 2/1/08; AMD, 2010 MAR p. 1088, Eff. 4/30/10; AMD, 2016 MAR p. 22, Eff. 1/9/16.