Montana for retirees: Social Security and pensions taxed, the age-65 subtraction, and the property tax side

Since tax year 2024 Montana has taxed retirement income the way the federal government does. The portion of Social Security that is taxable on Form 1040 is taxable on Form 2. Pensions, annuities, traditional IRA withdrawals, 401(k) and 403(b) distributions are Montana ordinary income in full, taxed at 4.7% up to $47,500 single or $95,000 joint and 5.65% above that. The old pension exclusion and the Montana Social Security worksheet are gone. What a retiree gets instead is the whole federal deduction stack, because Form 2 starts from federal taxable income: the standard deduction, the additional standard deduction for age, and the new $6,000 per-person senior deduction all reduce Montana income automatically. On top of that Montana allows its own age-65 subtraction, $5,660 per person for 2025 with the 2026 figure to come. For most retired couples on Social Security and a modest pension, the Montana tax after all that is a few hundred to a couple of thousand dollars.

Two kinds of retirement income escape. Tier I and Tier II Railroad Retirement benefits are fully exempt on Schedule I. And a working military retiree can exempt up to half of DFAS retirement pay for five years under the Working Military Retirement Exemption. Everything else, including government pensions, is taxed.

Social Security

Form 1040 decides how much of a Social Security benefit is taxable, from none to 85%, based on the federal formula that adds half the benefit to other income. Montana takes that taxable figure as part of federal AGI on Form 2 line 1 and does nothing further with it. There is no Montana exclusion, no second worksheet and no add-back. A couple whose benefit is not taxed federally owes Montana nothing on it; a couple whose benefit is 85% taxable federally pays Montana on the same 85%.

That makes the federal formula the thing to manage. Each dollar of IRA withdrawal above the federal thresholds can pull up to 85 cents of Social Security into taxable income, and in Montana that 85 cents is then taxed again at 4.7% or 5.65%. The planning that reduces federal tax on Social Security, spreading IRA withdrawals, qualified charitable distributions after 70½, holding taxable gains in low-income years, reduces Montana tax as well.

Pensions, IRAs and 401(k)s

The federally taxable amount from each 1099-R, box 2a, is in federal AGI and so in Montana income. Early distributions, inherited IRA distributions, required minimum distributions and lump sums are all treated the same way. Montana has no penalty of its own on early withdrawals and no exclusion for any of them. A pension earned in another state and paid to a Montana resident is Montana’s to tax, and Montana taxes it; federal law since 1996 bars the former state from doing so.

What comes off before the rate

Because the return starts from federal taxable income, a retired couple’s deductions for 2026 stack like this:

A couple who itemize federally use their Schedule A total instead of the standard deduction and the age additions; the senior deduction and the Montana subtraction still apply. The federal senior deduction phases out above $150,000 of joint modified AGI ($75,000 single), and when it shrinks federally it shrinks for Montana.

The Montana age-65 subtraction is claimed per person who is 65 at year end. It is the one piece of the stack that belongs to Montana alone. The Department’s 2026 publications still list the 2025 amount of $5,660; the subtraction is indexed, and the 2026 Form 2 instructions, usually released in late December, will give the final number.

Roth conversions

A Roth conversion is a taxable IRA distribution, and Montana taxes it as ordinary income in the year of the conversion. The cost is 4.7% on the part that fits under the bracket line and 5.65% above it. For a couple with $40,000 of other Montana ordinary income, the first $55,000 of a conversion costs 4.7%, or $2,585; the rest costs 5.65%. That is a real cost, but a known one, and the wide 4.7% bracket makes a series of moderate conversions cheaper in Montana than one large one. For 2027 the bracket line moves to $130,000 joint and the top rate to 5.4%, so a conversion that can wait a year is taxed less.

The federal side is where conversions usually hurt more: a conversion raises AGI, which can make more Social Security taxable, raise Medicare premiums two years later through IRMAA, and shrink the federal senior deduction, which phases out above $150,000 joint. Each of those federal effects then flows into Montana income as well.

Capital gains in retirement

Net long-term capital gains are taxed at 3% on the part that fits under the bracket line after ordinary income, and 4.1% above it. For a retired couple with $31,000 of Montana ordinary income, the first $64,000 of long-term gain is taxed at 3%. A retiree selling appreciated stock or a rental property pays less Montana tax per dollar on the gain than on an IRA withdrawal of the same size. Qualified dividends do not get the gain rates; they are ordinary income.

Military and railroad retirement

Railroad Retirement Tier I and Tier II benefits are subtracted in full on Schedule I. Military retirement pay is ordinary income, with one exception. Under the Working Military Retirement Exemption, a Montana resident who receives military retirement pay and also has Montana earned income may subtract part of the retirement pay for five consecutive years. The Department describes the amount as 50% of the DFAS retirement pay, or the Montana-source wages, business or farm income (verify the two are read as the lesser of). The retiree must have become a Montana resident after June 30, 2023, or have been a resident before the retirement pay began and stayed one. The five years start with the year of retirement, with 2024 for those already retired and resident, or with the year of moving in; the clock runs whether or not the exemption is claimed. Survivor Benefit Plan recipients may subtract up to 50% of their benefits. The claim goes on Form WMRE attached to Form 2. A retiree who leaves Montana and comes back cannot claim it again.

Property tax relief for seniors

The Department of Revenue appraises every property in Montana, so the property tax programs are its programs, and there are three a retiree should know.

The homestead rate replaced the one-time 2025 rebate of up to $400 of 2024 property taxes; no rebate is scheduled for 2026. The Montana Disabled Veteran program gives a 100% service-connected veteran or surviving spouse a larger reduction with higher income limits.

The elderly credit deserves a second look from anyone 62 or older with household income under $45,000, including renters and people in assisted living. Only out-of-pocket rent counts for residents of care facilities, not meals or nursing care. The credit is refundable, so it pays out even when there is no Montana tax to offset, and a person who has no reason to file Form 2 can file the credit by itself, free, in the Department’s portal.

Withholding and estimated payments

Montana withholding on a pension or IRA distribution is optional with the payer; many out-of-state payers do not offer it. A retiree whose Montana tax after withholding will exceed $500 must make estimated payments on April 15, June 15, September 15 and January 15, with a safe harbor of 100% of last year’s tax or 90% of this year’s. The year of retirement is excused: a person who retires at 62 or older owes no estimated payments for that year or the next, and neither does a person who became disabled. After that, the simplest fix is Montana withholding on the largest pension, if the payer offers it. Social Security withholding is federal only, so most retirees end up making the four payments through the TransAction Portal.