How Montana income tax works: federal taxable income, two brackets, and a low rate on long-term gains

Montana rebuilt its income tax return for 2024 and then cut the rates for 2026. Form 2 now starts from federal taxable income, which means the federal standard deduction, itemized deductions and the new 2025 federal deductions for tips, overtime, car-loan interest and seniors all reduce Montana income automatically. The state then makes a handful of additions and subtractions on Schedule I, splits out net long-term capital gains, and applies two rates to what is left: 4.7% on Montana ordinary income up to $47,500 single, $71,250 head of household or $95,000 joint, and 5.65% above that. Long-term gains are taxed at 3% and 4.1%. There is no Montana standard deduction, no personal exemption, no local income tax and no sales tax. For 2027 the top rate drops to 5.4% and the 4.7% bracket widens again.

The 2026 numbers come from House Bill 337, signed April 28, 2025. For 2025 the 4.7% bracket ended at $21,100 single, $31,700 head of household and $42,200 joint, and the top rate was 5.9%. For 2026 the bracket more than doubled and the top rate fell a quarter point. A married couple with $90,000 of Montana ordinary income paid some 5.9% tax in 2025 and pays only 4.7% in 2026. That is the single biggest change on the 2026 Montana return, and it happens without the filer doing anything.

Who files

A Montana resident or part-year resident files Form 2 whenever they had a federal filing requirement. A nonresident files when they had a federal filing requirement and any Montana-source income: wages for work done in Montana, rent from Montana property, income from a Montana business. Anyone with a Montana addition or subtraction files even without a federal requirement, and anyone with Montana withholding should file to get it back. Residents report all income from everywhere, with a credit for tax paid to another state. Nonresidents and part-year residents compute tax on everything and then take the Montana share on Schedule II; see Moving to Montana. Married couples use their federal filing status; when one spouse is a resident and the other is not, the couple may file a joint “mixed residency” return.

Where it starts: federal taxable income

Line 1 of Form 2 is federal adjusted gross income from Form 1040. Line 2 is the total of the federal deductions that come after it: the standard deduction or itemized deductions, plus the Schedule 1-A deductions for tips, overtime, car-loan interest and the $6,000 senior deduction. Line 1 minus line 2 is federal taxable income for Montana purposes. One federal deduction is left out on purpose: the 20% qualified business income deduction. The Department of Revenue’s instructions say not to include it, so a sole proprietor, partner or S corporation owner has a Montana taxable income that is higher than the federal figure by the amount of the QBI deduction.

Starting from taxable income rather than AGI has two consequences. First, the federal standard deduction is in effect the Montana standard deduction: $16,100 single, $24,150 head of household and $32,200 joint for 2026, plus the additional amounts for age 65 and blindness. Montana has had no standard deduction or personal exemption of its own since 2024. Second, every below-the-line deduction Congress creates flows into Montana unless the Legislature stops it, and the Legislature, which does not meet in regular session until January 2027, has stopped none of the 2025 ones. A tipped worker who owes no federal tax on $8,000 of tips owes no Montana tax on them either. The same goes for overtime pay, car-loan interest, the senior deduction, 100% bonus depreciation on a Schedule C or F, and the 2026 charitable deduction for people who do not itemize (verify).

If you itemize. A filer who itemized federally itemizes for Montana too, because the Schedule A total is what reaches line 2. Montana then takes back one piece of it. State income tax deducted on Schedule A is added back on Schedule I, but only to the extent the itemized total exceeds the federal standard deduction. Worksheet B in the Form 2 instructions does the arithmetic. The logic is that Montana will not let you deduct Montana tax from Montana income, but it also will not leave you worse off than if you had taken the standard deduction. With the federal SALT cap at $40,000 for 2026, more Montanans itemize than did in 2025, so this add-back shows up on more returns.

Schedule I: additions and subtractions

Schedule I is short. Most wage-earning households have nothing on it; most retired households have one line.

Above-the-line federal adjustments such as IRA contributions, HSA deposits and the deductible half of self-employment tax need no Montana line; they are already out of federal AGI before line 1.

The age-65 subtraction is the one Montana-specific break for older filers, and it replaced a longer list of pension and interest exclusions that ended with 2023. It is per person, so a couple both 65 or older subtracts twice. The amount is indexed; the Department’s 2026 publications still show the 2025 figure of $5,660, and the 2026 Form 2 instructions will settle it. Retirement income itself, Social Security included, is taxed to the federal extent; see Montana for retirees.

The 529 subtraction covers contributions to Achieve Montana or any other state’s plan, up to $4,600 per taxpayer or $9,200 on a joint return for 2026, and is the subtraction most often missed because the federal return never asks about 529 deposits. Withdrawals that are not qualified, or that come from an account open a year or less, are recaptured at the top Montana rate. Credits and breaks for Montana families has the details.

The rates

Montana taxable income is federal taxable income plus additions minus subtractions. The return then pulls out net long-term capital gains and calls the rest Montana ordinary income, because the two are taxed at different rates.

Estates and trusts use the single brackets. The 2026 and 2027 figures are from the Department’s HB 337 notice.

Long-term capital gains get their own two rates, 3% and 4.1%, and the line between them is the same bracket line. The 3% rate applies to the part of the gain that fits under the bracket line after Montana ordinary income is counted first; 4.1% applies to the rest. If ordinary income alone is already over the line, the whole gain is taxed at 4.1%. The gain is the federal net long-term figure, so federal basis, losses and carryforwards all carry over. Short-term gains, qualified dividends and interest do not get the lower rates; they are ordinary income at 4.7% or 5.65%.

The credits

Montana’s credits are on Schedule III. Two are refundable and reach a lot of households; the rest are nonrefundable and mostly specialized.

There is no Montana child tax credit, no child and dependent care credit and no property tax credit on the income tax return other than the elderly credit. Property tax relief for homeowners under 62 runs through the Department’s property side, the homestead rate and the Property Tax Assistance Program, not through Form 2.

Withholding and estimated payments

Montana withholding on wages is set with Form MW-4, the Montana Employee’s Withholding Allowance and Exemption Certificate. The federal W-4 is not accepted for Montana. The MW-4 also carries the exemptions for North Dakota residents and for nonresident military spouses.

Estimated payments are required when Montana tax after withholding and nonrefundable credits is expected to exceed $500, a lower threshold than the federal $1,000. Payments are due April 15, June 15 and September 15, 2026 and January 15, 2027. The safe harbor is 100% of last year’s Montana tax or 90% of this year’s, in four equal installments; there is no 110% rule for higher earners. Excused: a person who retired at 62 or older, in the year of retirement and the next; a person who became disabled; and a farmer or rancher with two-thirds of gross income from farming. Underpayment interest is figured daily on Form EST-I at the rate for the year the return is due; the 2026 rate is 7%, and the 2027 rate is to come.

How to file

Form 2 is due April 15, 2027. The extension is automatic, six months to October 15, with no form to file, but it extends the filing, not the payment: tax not paid by April 15 draws a late-payment penalty of 0.5% a month up to 12%, plus interest. Form 2EZ was discontinued; everyone uses Form 2, which has the schedules built in. Refunds can take up to 90 days, and first-time Montana filers get a paper check rather than direct deposit. Dates, forms, free-file options and the refund tracker are in Montana calendar and forms.

What trips people up

• The QBI deduction left in federal taxable income on line 2. Montana excludes it.
• State income tax from Schedule A not added back on Schedule I, or added back in full instead of only the amount above the standard deduction.
• The age-65 subtraction taken once on a joint return where both spouses are 65.
• Qualified dividends or short-term gains put in the long-term capital gains line for the 3% rate. Only net long-term gains qualify.
• A 529 contribution nobody mentioned, because the federal return did not ask.
• Estimated payments skipped because the federal $1,000 threshold was in mind; Montana’s is $500.