(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 15-30-111 , 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 15-30-111 , 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.