42.15.205    REFUNDS OF FEDERAL INCOME TAX

(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.

History: 15-30-2620, MCA; IMP, 15-30-2110, 15-30-2131, MCA; NEW, 2007 MAR p. 485, Eff. 4/13/07; AMD, 2008 MAR p. 178, Eff. 2/1/08; AMD, 2010 MAR p. 1088, Eff. 4/30/10.