Millions of people age 62 and above draw monthly Social Security retirement benefits. The Social Security program also offers benefits to disabled workers. To be eligible for either retirement or disability, you must pay in to the system through payroll tax withholding or self-employment taxes. Some states consider Social Security as part of your taxable income.
Federal and Montana Taxes
For purposes of federal income tax, a portion of your Social Security benefits may be taxable, depending on your income level and filing status. The state of Montana considers all Social Security benefits you receive as part of your "total income," though the Social Security portion that is subject to state tax may be different from the taxable portion at the federal level. Any and all other pension income, public or private, falls into the same category in Montana, except for railroad retirement benefits, which are not subject to state income tax.
In order to calculate the portion of your Social Security benefits subject to Montana state income tax, you must fill out Worksheet VIII of the state's tax return. The form has you add up income from all sources, then subtract the state's allowed adjustments to that income. If the result is less than $32,000 for married, joint filers, or $25,000 for single filers, then your Social Security benefits are not subject to state income tax. The relevant income limit for those filing as "head of household" is $16,000.
State and Federal Tax Rates
Montana's tax rates, even on the taxable portion of Social Security, are lower overall than that of the federal government. The state levies a tax rate ranging from 1 to 6.9 percent, depending on your adjusted income level. At the federal level, individual tax rates run from zero to 39.6 percent, as of 2013, and taxpayers pay on a portion of their Social Security benefits at whatever their individual tax rate is. The portion of Social Security benefits that is subject to tax at the federal level ranges from zero to 85 percent.
Montana and Retirement
In a 2012 analysis by the financial media company Kiplinger, Montana was found "not tax-friendly" for retirees. Although the state does not impose sales taxes, it does tax Social Security benefits and pensions, unlike a small majority of states that don't include any Social Security in taxable income. For retirees, there is still good tax news: Montana allows a $1,000 tax credit for homeowners who are 62 or older and who have lived in the state for at least nine months, have owned their property for at least six months, and have $45,000 or less of gross income.
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