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Montana Retirement Tax Friendliness

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Overview of Montana Retirement Tax Friendliness

Montana fully taxes most forms of retirement income, while taxing a portion of Social Security benefits for retirees above a certain income level. Property taxes in Montana are fairly low. There is no sales tax in Montana.

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You will pay of Montana state taxes on your pre-tax income of
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Quick Guide to Retirement Income Taxes
is toward retirees.
Social Security income is taxed.
Withdrawals from retirement accounts are taxed.
Wages are taxed at normal rates, and your marginal state tax rate is %.
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    Jim Barnash is a Certified Financial Planner with more than four decades of experience. SmartAsset’s retirement expert is passionate about helping both individuals and business owners prepare for retirement. Jim has run his own advisory firm, worked for large financial services companies and even acted as a consultant to help other advisors grow their businesses. He is an author and public speaker on a variety of financial topics. Jim previously served for six years as President and Chairman for the Financial Planning Association. He also instructs others about the topic – Jim has created and taught courses on financial planning at DePaul University and William Rainey Harper Community College.

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Montana Retirement Taxes

Photo credit: ©iStock.com/omersukrugoksu

Montana has the third lowest population density of any state in the country, but it’s crowded with breathtaking scenery. From Glacier National Park to the headwaters of the Missouri River, Montana is the perfect place for seniors who want to spend their golden years surrounded by natural splendor.

Unlike its landscape, Montana’s tax system may disappoint some seniors. That’s because it fully taxes most forms of retirement income, while taxing a portion of Social Security benefits for retirees above a certain income level. Below, we answer key questions about retirement taxes in Montana, including the state’s sales and property taxes.

Is Montana tax-friendly for retirees?

Montana is moderately tax-friendly for retirees. Depending on your specific financial circumstances, you may find it very friendly or very unfriendly. For starters, the state has no sales tax, which lowers living costs for everyone. It also has relatively low property taxes.

On the other hand, many retirees pay taxes on Social Security retirement benefits, which is fully exempt in most other states (more on these rules in the next section). Likewise, Montana provides no exemption for retirement income from pensions or retirement accounts.

Is Social Security taxable in Montana?

Yes, but there is a deduction available for taxpayers below a certain income level. For taxpayers with Adjusted Gross Income (AGI) of less than $25,000 for single filers or $32,000 for joint filers, all Social Security retirement income is deductible.

For taxpayers above those limits but below $34,000 for single filers or $44,000 for joint filers, half of Social Security retirement income is deductible. Above those second-level limits, 15% is deductible.

Are other forms of retirement income taxable in Montana?

Yes. Income from a pension or from a retirement account like a 401(k) or an IRA is treated as regular income and taxed at Montana’s state income tax rates. The table below shows brackets and rates for the Montana state income tax.

Income Tax Brackets

All Filers
Montana Taxable IncomeRate
$0 - $2,9001.00%
$2,900 - $5,2002.00%
$5,200 - $7,9003.00%
$7,900 - $10,6004.00%
$10,600 - $13,6005.00%
$13,600 - $17,6006.00%
$17,600+6.90%

How high are property taxes in Montana?

Property taxes in Montana are fairly low. The state provides an exemption on all residential property that greatly reduces the property tax burden of residential homeowners. The average effective property tax rate paid by homeowners is 0.85% across the state. That’s equal to $850 in property taxes for every $100,000 in home value. It’s important to note, however, that this will vary based on where in the state you live.

Photo credit: ©iStock.com/aimintang

What is the Montana elderly homeowner tax credit?

Montana homeowners who are at least 62 years old can apply for a tax credit on their property taxes. To be eligible they must pay the property taxes for a home they occupy or rent. Total household income must be less than $45,000 and household income must be less than $35,000 to receive the full credit amount.

The Elderly Homeowner Credit is worth a maximum of $1,000. Claimants with household income of between $35,000 and $45,000 will receive between 40% and 10% of the full credit. The credit may also be less than $1,000 if your property taxes paid were below a certain level.

How high are sales taxes in Montana?

There is no sales tax in Montana. Retirees can do all of their Montana shopping tax-free.

What other Montana taxes should I be concerned about?

Capital gains are taxed as income in Montana, though they receive a credit of 2%. If you have investments with which you plan to supplement your income in retirement, keep in mind that you will pay state income taxes when you sell those investments.

Most Tax Friendly Places for Retirees

SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.

Highest
Lowest
Rank City Income Tax Paid Property Tax Rate Sales Tax Paid Fuel Tax Paid Social Security Taxed?

Methodology Our study aims to find the areas with the most tax-friendly policies for retirees. To do that we looked at how the tax policies of each city would impact a retiree with a $50,000 income. Our hypothetical retiree is getting $15,000 from Social Security benefits, $10,000 from a private pension, $15,000 from retirement savings like a 401(k) or IRA and $10,000 in wages.

To calculate the expected income tax this person would pay in each location we applied deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at the federal, state, county and local levels.

We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.

In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income less income tax. This product is then multiplied by 35% to estimate the sales tax paid.

For fuel taxes, we first distributed statewide vehicle miles traveled down to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.

For each city we determined whether or not Social Security income was taxable.

Finally, we created an overall index weighted to best capture the taxes that most affect retirees. We gave a 4x weighting to income tax, 3x weighting to property tax rate, a 2x weighting to sales tax and 1x weighting to fuel tax.

Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2016 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration