Montana Tax Form 2 Schedule 1 through 8 - Schedules Instructions

General Information Schedule I

Line 1 – Interest and Mutual Fund Dividends from Other States’ State, County, or Municipal Bonds.

Enter the interest and dividend income that you received from bonds and obligations of another state, territory or county; municipality; district or other political subdivision of another state.

Line 2 – Dividends Not Included in Federal Adjusted Gross Income.

Enter the amount of the dividends that you received as Montana source income that are not already included in your federal adjusted gross income. Please do not include your qualified dividends reported on Montana Form 2, line 9b, since these dividends are already in the total of your ordinary dividends reported on line 9a.

Line 3 – Taxable Federal Refund.

If you received a 2007 federal income tax refund in 2008 and you claimed federal income taxes paid as an itemized deduction on your 2007 Montana tax return, you may need to report a portion or all of your federal refund as income on your 2008 Montana tax return. This is called the Tax Benefit Rule.

To the extent that the federal tax deduction that you claimed on your 2007 Montana income tax return reduced the amount of your 2007 Montana income tax liability, any subsequent refunds from this deduction are considered income in the year that you received it.

Please Note: Do not include the federal economic stimulus package rebate you may have received in 2008 as part of your federal refund for the 2007 tax year.

You will need to complete Worksheet II, Tax Benefit Rule for Federal Income Tax Refund, to determine whether your federal income tax refund is taxable in 2008, unless one of the following scenarios applies to you:

• If you received a federal income tax refund in 2008 and did not itemize deductions in 2007, none of your federal income tax refund is taxable. Stop here, you do not need to complete Worksheet II.
• Your deduction for federal taxes paid in 2007 may have been limited on your Montana tax return to $5,000 ($10,000 if filing a joint return). Because of this limitation, your refund may or may not be taxable. A simple way to check this is to subtract the refund that you received in 2008 from the total federal income taxes paid in 2007 (Form 2, Schedule III, lines 7a through 7d or Form 2M, Schedule I, lines 7a through 7d). If the result is more than $5,000 ($10,000 if you filed a joint return), none of the refund is taxable. Stop here, you do not need to complete Worksheet II. If the result is less than $5,000 ($10,000 if you filed a joint return), please complete Worksheet II to determine whether your federal income tax refund is taxable.

If you and your spouse filed your federal tax return jointly and are now filing your Montana return separately, you will each need to complete a separate tax benefit rule worksheet. Prorate your federal income tax refund between you and your spouse by applying the ratio of your 2007 federal income tax deduction to the total federal tax deducted.

Line 4 – Other Recoveries of Amounts Deducted in Earlier Years that Reduced Montana Taxable Income.

If in 2008, you received a reimbursement of an amount that you previously deducted on your Montana income tax return and this deduction originally reduced the amount of your Montana income tax liability in the year of the deduction, you may need to report as income a portion or all of the reimbursement that you received on your 2008 Montana income tax return. For example, you may have recovered amounts from more than one year, such as a federal income tax refund from 2004 and a casualty loss reimbursement from 2003.

To the extent that these deductions reduced your income tax liability in 2003 and 2004, you are required to include these reimbursements as income in 2008. If you have a reimbursement from a prior year deduction other than your 2007 federal income tax refund, please call us toll free at (866) 859-2254 (in Helena, 444-6900) to get Worksheet IX, Tax Benefit Rule for Recoveries of Itemized Deductions or you can download this worksheet from our website at mt.gov/revenue.

Line 5 – Addition to Federal Taxable Social Security/ Railroad Retirement.

Your social security benefits taxable to Montana may be different from the amount of taxable benefits that you reported on Form 2, line 20b. You should determine your Montana taxable social 2008 Montana Individual Income Tax Form 2 Schedule Instructions Page 24

security benefits by completing Worksheet VIII found on page 55 of this booklet. Before you can complete your social security worksheet, you will need to complete your partial pension and annuity income worksheet, Worksheet IV found on page 52.

After you have completed your social security worksheet and you find that your social security benefi ts taxable to Montana are greater than those that you reported on Form 2, line 20b, enter that difference on this line. If your social security benefits taxable to Montana are less than those that you reported on Form 2, line 20b, you should report that difference as a subtraction from federal adjusted gross income on your Schedule II, line 22.

Line 6 – Sole Proprietor’s Allocation of Compensation to Spouse.

If you are a sole proprietor reporting net income on your federal Forms C or F, you have to report the full amount of your income in column A or B to determine your federal adjusted gross income on Form 2. However, if your spouse regularly and systematically provides substantial personal services in the operations of your business and is not paid a salary or wage, you can allocate a reasonable amount of compensation to your spouse. This allocation will be based on an amount that is equivalent to the services that your spouse provides. It is considered taxable income to your spouse. This allocation will further reduce your taxable income as the sole proprietor of the business.

Services that your spouse provided for operating your household or services that are incidental to your operations cannot be used as a basis for allocation of income to your spouse. When you claim this addition to income, you should be prepared to provide us with verification of those services performed and the substantial contribution made by your spouse.

Report on this line the amount of income allocated to your spouse and report the offsetting subtraction on Schedule II, line 26 in your spouse’s column.

Line 7 – Medical Care Savings Account Nonqualified Withdrawals.

Your nonqualified withdrawal from a Montana medical care savings account is a withdrawal that you made during the tax year for any purpose other than to pay for eligible medical expenses or long- term care. You can refer to Montana Form MSA for detailed instructions. You should report any nonqualified withdrawals from your Montana medical care savings account as an addition to federal adjusted gross income on this line.

Please note that you may also be charged a penalty for making any nonqualified withdrawal. See the instructions on Form 2, line 66, page 20 and on Form MSA-P for the Montana medical care savings account 10% penalty.

Line 8 – First-Time Home Buyer Savings Account Nonqualified Withdrawals.

Your nonqualifi ed withdrawal from a Montana first-time home buyer savings account is a withdrawal that you made during the tax year for any purpose other than to pay for the eligible cost of purchasing your single family residence. You can refer to Montana Form FTB for further detailed instructions. You should report any nonqualified withdrawals from your Montana first-time home buyer savings account as an addition to federal adjusted gross income on this line.

Please note that you may also be charged a penalty for making any nonqualified withdrawal. See the instructions for Form 2, line 66, page 20, and on Form FTB-P for the Montana first-time home buyer savings account 10% penalty.

Line 9 – Farm and Ranch Risk Management Account Taxable Distributions.

The distribution from your Montana farm and ranch risk management account is taxable if that distribution is from a fund that is previously excluded from Montana adjusted gross income as a farm and ranch risk management account deposit or if that distribution was not distributed within five years from the date that your original deposit was made. You can refer to Montana Form RFM for detailed instructions. You should report your Montana farm and ranch risk management account taxable distributions as an addition to federal adjusted gross income on this line.

You may also be subject to a penalty on your farm and ranch management account distribution if it is not distributed within five years from the date of the original deposit. See the instructions for Form 2, line 66, page 20, for the farm and ranch risk management account 10% penalty.

Line 10 – Dependent Care Assistance Credit Adjustment.

If you have claimed business expenses for providing dependent care assistance on your federal Schedules C, E or F and now are claiming the Montana dependent care assistance credits on Schedule V, line 16, you will have to add the amount of the dependent care assistance expenses used to calculate your Montana dependent care assistance credits on Form DCAC as an addition to federal adjusted gross income on this line.

Line 11 – Addition for Smaller Federal Estate and Trust Taxable Distributions.

Differences between Montana’s laws and the federal laws may mean that the Montana taxable distribution that you received from an estate or trust is greater than your federal taxable distribution from the same estate or trust. If so, the difference is an addition to federal adjusted gross income and you should report it on this line.

Line 12 – Federal Net Operating Loss Carryover.

The federal net operating loss carryover that you reported on your Form 2, line 21 may be different from the amount of your Montana net operating loss carryover. On this line, you should record the amount of your federal net operating loss carryover that you reported on line 21, and then compute your Montana net operating loss carryover using Montana Form NOL.

If you have a 2008 Montana net operating loss, generally depreciation or amortization when you determine your you are required to first carry back this net operating loss Montana adjusted gross income.

to the two tax years preceding the loss year and then carry forward the balance of your 2008 net operating loss 20 years following the loss year. The federal special carry back rules apply for farm net operating losses and casualty losses. You may elect to forgo the carry back of your 2008 net operating loss and carry forward that loss. In order to forgo your carry back, you are required to make an election on Montana Form NOL by April 15, 2009—or by October 15, 2009, if you have a valid extension. Once you have made this election, it is irrevocable and you will not be able to carry back your 2008 net operating loss.

If you are carrying forward a net operating loss that occurred prior to January 1, 1999, you will need to use Montana Form NOL-Pre-99 to determine your carryover amount.

Line 13 – Share of Federal Income Taxes Paid by Your S Corporation.

If you are a shareholder in an S corporation that is required to pay a federal income tax on its income, you will have to add to your federal adjusted gross income that portion of your income that has been reduced by the federal income taxes paid by your S corporation. Refer to your federal Schedule K-1 to determine the amount of income that you are required to include as an addition to your federal adjusted gross income.

Line 14 – Title Plant Depreciation or Amortization.

If you are taking a federal deduction for depreciation or amortization on a title plant, you should add back to your federal adjusted gross income the amount of this

Line 15 – Premiums for Insure Montana Credit.

If you were the owner of a business that received a tax credit from the Insure Montana Small Business Health Insurance program, you are not allowed a deduction for the premiums used to calculate the credit. Because the credit cannot exceed 50% of the premiums, multiply the amount of credit you are claiming by two and enter the result this line.

Line 16 – Other Additions.

Enter any other additions to federal adjusted gross income not described in lines 1 through 15. Some examples of other additions include:

• You may have a passive or rental loss carryover that is larger for federal purposes than for Montana purposes because of differences in state and federal filings in prior years. If this results in a larger passive or rental income reportable on your state return, enter the additional amount here.
• You may have a larger capital loss carryover for federal purposes than for Montana purposes for a similar reason. If this results in larger reportable capital gains, enter the additional amount. Please note that when computing your Montana adjusted gross income, you are allowed to carryover capital losses incurred prior to becoming a Montana resident.
• Compensation and expenditures used to compute the film production credit have to be included in taxable income in the year that the compensation and expenditures were incurred.

 

General Information Schedule II

Line 1 – Exempt Interest and Dividends from Federal Bonds, Notes, and Obligations.

If you have received interest on United States government obligations and mutual fund dividends attributable to that interest, you can subtract these amounts from your federal adjusted gross income as long as they are included in your federal adjusted gross income on Form 2, page 1. In addition, if you received interest on obligations from U.S. territory or government agency obligations that are specifically exempt by federal law or any mutual fund dividends attributable to this interest, you can subtract these amounts from your federal adjusted gross income as long as they are included in your federal adjusted gross income on Form 2, page 1.

Obligations that are guaranteed by the United States government are not tax exempt. If you have received interest or mutual fund dividends attributable to Government National Mortgage Association (Ginnie Mae) bonds, Federal National Mortgage Association (Fannie Mae) bonds, or Federal Home Loan Mortgage Corporation (FHLMAC) securities, you can not subtract this interest or mutual fund dividends since they are not exempt under federal law.

United States obligations that are exempt include:

• Series E, EE, F, G and H savings bonds
• U.S. treasury bills
• U.S. government notes
• U.S. government certificates

Please refer to your federal Form 1099-DIV to determine what percentage of your dividends qualifies for this exemption.

Line 2 – Exempt Tribal Income.

If you are an enrolled member who lives and works on the reservation governed by your tribe, you can subtract from your federal adjusted gross income all reservation source wages and income that you have earned. If your wages or other income was earned from both reservation sources and nonreservation sources, you can exclude from your federal adjusted gross income only those wages or other income that you received while you lived and worked within the exterior boundaries of the reservation governed by your tribe. If you did not reside on your own reservation for the entire year, you can subtract only those wages or other income that you earned while you lived and worked on your own reservation.

If you reside outside the boundaries of the reservation governed by your tribe, or if you live on another reservation that is not governed by your tribe, there is no special exemption for income that you earn unless that income is derived directly from allotted or restricted lands that are held in trust by the United States.

If you are a tribal member whose federal gross income meets the filing requirements listed on page 2 of these instructions, you have to file a Montana individual income tax return even though your income may be exempt income. To exempt your income from Montana tax, you should complete your Montana Form 2 and attach Montana Form IND, Indian Certification, which needs to be signed by a representative of your governing tribe who can attest to your residency on your reservation along with your tribal enrollment number.

Line 3 – Exempt Unemployment Compensation.

If you have received unemployment benefits from Montana or from another state, these benefits are not taxable to Montana. If you reported taxable unemployment benefits on your Form 2, line 19, enter the amount of these benefits on this line.

Line 4 – Exempt Workers’ Compensation Benefits.

Benefits received under the workers’ compensation laws are not taxed by Montana. If you reported taxable workers’ compensation benefits in your federal adjusted gross income, enter the amount of these benefi ts on this line.

Line 5 – Exempt Capital Gains and Dividends from Small Business Investment Companies.

If you have capital gains or dividend income from an investment in a small business investment company (SBIC) included in your federal adjusted gross income, you are allowed to exempt these capital gains or dividends in arriving at your Montana adjusted gross income. In order for you to exempt this income, you have to meet the following conditions:

• The small business investment company is organized for the purpose of diversifying and strengthening employment opportunities of companies in Montana.
• Within one year of being licensed by the federal Small Business Administration, 75% of the small business investment company’s investments are in manufacturing or timber companies located in Montana.
• The manufacturing and timber companies have at least 50% of their employees working in Montana.

Line 6 – State Income Tax Refunds.

If you are required to include your state income tax refund in your federal adjusted gross income on Form 2, line 10, you can exclude this amount on this line. Montana income tax refunds and income tax refunds received from another state are not taxable to Montana.

Line 7 – Recoveries of Amounts Deducted in Earlier Years That Did Not Reduce Montana Income.

If you are required to include in your federal adjusted gross income any amounts that you recovered from a previous federal income tax deduction and if this previous deduction did not reduce your Montana income tax liability in the year of that deduction, you can subtract the amount of this recovery from your Montana adjusted gross income.

Line 8 – Exempt Military Salary of Residents on Active Duty.

If you are a Montana resident receiving military compensation and if this compensation is included in your federal adjusted gross income, you can subtract from your federal adjusted gross income your basic, special and incentive pay that you receive from:

• serving on active duty as a member of the regular armed forces,
• being a member of a reserve component of the armed forces or as a member of the National Guard serving on active duty in a contingent operation as it is defined in 10 USC 101,
• being a member of the National Guard and assigned to active service authorized by the President of the United States or the Secretary of Defense for a period of more than 30 consecutive days for the purpose of responding to a national emergency declared by the president and supported by federal funds.

Military compensation that you have received from the following activities cannot be subtracted from your federal adjusted gross income:

• Salaries that you have received for annual training and weekend duty
• Salaries that you have received for being a member of a reserve component of the armed forces that is not received under 10 USC 101
• Income you have received from retirement, retainer, equivalent pay or allowances

When you claim this exemption, you will need to attach verification of your military status (such as your military orders) to your income tax return.

Line 9 – Exempt Income of Nonresident Military Servicepersons and Spouses.

If you are a nonresident of Montana, living in Montana solely by reason of compliance with your military orders, you are not required to establish residency in Montana and your military compensation is not considered Montana source income and is not taxable to Montana. On this line, you should subtract the military compensation that you included in your federal adjusted gross income on Form 2, line 7.

If you and/or your spouse have received any other income that is considered Montana source income (such as wages for services performed in Montana or Montana business income), this income is taxable. You should complete a nonresident Montana income tax return and report both your Montana source and non-Montana source income and then prorate your Montana tax liability on Schedule IV, Nonresident/Part Year Resident Tax.

Line 10 – Exempt Life-Insurance Premiums Reimbursement for National Guard and Reservist.

If you are a Montana National Guard member or Reservist who is serving on active duty in a contingency operation and you were reimbursed by the Montana Department of Military Affairs for the life insurance premiums that you paid for benefits under the service members’ group life insurance program, you can deduct these reimbursements from your federal adjusted gross income in arriving at your Montana adjusted gross income.

The reimbursement that you received is considered a bonus and is included in taxable income for federal income tax purposes. In order to exempt this reimbursement, you will need to have paid the premiums and have served on active duty in a contingency operation after February 28, 2006. The maximum amount of premium reimbursement that you are entitled to exempt cannot exceed $17.50 a month for each month that you are on active duty in a contingency operation.

Line 11 – Partial Pension and Annuity (Retirement) Income Exemption.

If you have reported taxable retirement income on your Form 2, lines 15b and/or 16b, you may be entitled to a partial exemption of this income. Before we determine if any of this retirement income is

excluded, we want to first find out if any of this income is from Tier II Railroad Retirement benefits. If so, your Tier II benefits are 100% exempt from Montana taxation. You should exclude your entire taxable Tier II Railroad Retirement benefi ts on Schedule II, line 23.

Premature distributions and early withdrawals of your retirement income do not qualify for the retirement income exclusion. Early distributions which required payment of the federal 10% additional tax do not qualify for this exemption. Also, if you have received a disability pension, which is identified as a distribution code 3 on your federal Form 1099-R, you should use Montana Form DS-1, 2008 Disability Income Exemption, to determine your deduction instead of the retirement income exclusion.

If you have received retirement income other than Tier II Railroad Retirement benefits, you should complete Worksheet IV on page 52 in order to determine the amount of your exclusion. Your retirement exclusion is limited to the lesser of your taxable retirement income that you have received or $3,600, as long as your federal adjusted gross income is $30,000 or less and you are filing a single return, filing jointly with your spouse and only one of you has taxable retirement income, or filing as head of household. If you are filing jointly with your spouse, both of you have retirement income, and your federal adjusted gross income is $30,000 or less, you both can exclude the lesser of your taxable retirement income that you receive personally or $3,600 each for a maximum of $7,200.

If both you and your spouse have received retirement income and you are filing your income tax return separately on the same form or on separate forms, the lesser of your retirement income or $3,600 applies separately to both spouses as long as your separately stated federal adjusted gross income is $30,000 or less.

When your federal adjusted gross income exceeds $30,000, your retirement exclusion is reduced $2.00 for every $1.00 that your federal adjusted gross income is over $30,000. For example, if your federal adjusted gross income is $31,000, your retirement exclusion is $1,600 ($3,600 – ($1,000 x $2.00) = $1,600). You are not entitled to this retirement income exclusion if your federal adjusted gross income is greater than $31,800 ($3,600 – ($1,800 x $2.00) = $0) if you are filing single, married filing separately, or head of household. If you are married and filing jointly, and both spouses have retirement income, then your retirement exclusion is phased out when your federal adjusted gross income is greater than $33,600 because your maximum retirement exclusion is $7,200 (($3,600 – ($1,800 x $2.00)) + ($3,600 – ($1,800 x $2.00)) = $0). You should complete Worksheet IV on page 52 to determine your partial pension and annuity income exemption.

Line 12 – Partial Interest Exemption for Taxpayers 65 and Older.

If you are single and are age 65 or older at the end of 2008, you can exempt up to $800 of the interest income that you reported in your Montana adjusted gross income.

If you are married and are filing a joint return with your spouse and at least one of you is age 65 or older at the end of 2008, you can exempt up to $1,600 of the interest income that you reported in your Montana adjusted gross income.

If you are married and filing your return separately and are age 65 or older at the end of 2008, you can exempt up to $800 of the interest income that you reported in your Montana adjusted gross income. Please note, however, that you are not allowed to exclude interest income earned by and reported by your spouse.

For the purpose of this exclusion, when you determine the amount of your interest income, you should consider distributions commonly called dividends on deposits or share accounts as interest. Under no circumstances can you exclude more interest income than what you have reported in your Montana adjusted gross income.

Line 13 – Partial Retirement Disability Income Exemption for Taxpayers Under Age 65.

You can qualify for a partial retirement disability income exclusion of up to $5,200 if you are:

• under the age of 65 and you are retired on disability, and
• not treating your disability income as a pension and annuity.

You are permanently and totally disabled if you are unable to engage in any substantial gainful activity, if you have been medically determined to be physically or mentally impaired, and if your condition is expected to last at least 12 months.

Your disability income is generally reported with a distribution code 3 on your federal Form 1099-R. If you qualify for this exclusion, you should complete Montana Form DS-1 in order to determine the amount of your exclusion. You should also attach a copy of the completed Form DS-1 to your income tax return.

Line 14 – Exemption for Certain Taxed Tips and Gratuities.

You can subtract from your federal adjusted gross income any tips and gratuities that you have received from patrons while you worked in the food, beverage or lodging industry. These should be reported as part of your federal adjusted gross income. All other tips and gratuities that you received for providing services in other business industries—such as hair stylists, paper carriers and river guides—are not excluded from your federal adjusted gross income in arriving at your Montana adjusted gross income.

Line 15 – Exemption for Certain Income of Your Child Taxed to the Parents.

If your federal adjusted gross income included unearned income of a dependent child as determined on federal Form 8814, you may be able to exclude the unearned income from your Montana adjusted gross income. You can exclude the unearned income from your adjusted gross income if your child’s gross income does not exceed $3,920 or they fi le their own Montana income tax return.

Line 16 – Exemption for Certain Health Insurance Premiums Taxed to Employee.

If you are a shareholder in an S corporation, you can subtract from your federal adjusted gross income to arrive at your Montana adjusted gross income the cost of your health insurance premiums to the extent they are included in your federal adjusted gross income.

Line 17 – Exemption for Student Loan Repayments Taxed to a Health Care Professional.

If you are a health care professional licensed in Montana, you can exclude from your federal adjusted gross income up to $5,000 of any health-related student educational loan repayments that are paid on your behalf when this repayment is included in your federal adjusted gross income. In order for you to qualify for this exclusion, you have to be a health care professional who:

• is licensed in Montana;
• participates in a federal, state or qualifi ed private loan repayment program, and these repayment programs are generally through the U.S. Department of Health and Human Service Corp. and their Nursing Education Loan Repayment Program, the Montana Rural Physician Incentive Program, or a qualified private program with a licensed health care facility in Montana;
• serves a significant portion of a designated geographic area, a special population, or a facility population in a federally designated health professional shortage area (HPSA), a medically underserved area (MUA), a medically underserved population (MUP), or a federal nursing shortage county.

You can determine if you are serving in an area listed above by contacting your employer or the Montana Department of Public Health and Human Services Primary Care Office at (406) 444-3934. To learn more about primary and preventative health care and ways to improve the health status of underserved and vulnerable populations, visit the Montana Department of Public Health and Human Services Primary Care Offi ce website at dphhs.mt.gov/PHSD/Primary-Care/primary-care-index. shtml, or the U.S. Department of Health and Human Services Bureau of Health Professions at bhpr.hrsa.gov/ shortage.

Line 18 – Exempt Medical Care Savings Account (MSA) Deposits and Earnings.

To determine your Montana adjusted gross income you can subtract from your federal adjusted gross income the amounts that you deposited into a Montana medical care savings account. Please don’t confuse this Montana MSA with the federal health savings account (HSA) that is deductible on Form 2, line 25. You are allowed to participate in both programs. See your federal income tax instructions for information on your federal HSA.

Your Montana medical care savings account provides you with the opportunity to exclude from your Montana adjusted gross income up to $3,000 plus accumulated interest or other earnings on these funds annually. If you are married filing jointly with your spouse or married filing separately with your spouse, both of you can qualify for your own Montana MSA and you each can exclude up to $3,000 plus accumulated interest or other earnings on this account annually. To qualify for this exclusion, you will need to establish a separate account that is owned by you alone and is not jointly held with your spouse or any other individuals. In addition, you cannot commingle other funds with this account. Once these funds are excluded from Montana adjusted gross income, they can be withdrawn only for the payment of qualifi ed medical expenses for you, your spouse or your dependent. Any of these funds withdrawn for other purposes are subject to tax in the year that they are withdrawn and they also may be subject to a 10% penalty if they are withdrawn on any day other than the last business day of the year.

For further instructions on the Montana medical care savings account, see Montana Forms MSA and MSA-P. When you claim this exclusion, you will need to attach a copy of Montana Form MSA to your income tax return.

Line 19 – Exempt First-Time Home Buyer Savings Account Deposits and Earnings.

To determine your Montana adjusted gross income, you can subtract from your federal adjusted gross income the amounts you deposited into a Montana first-time home buyer savings account. Your Montana first-time home buyer savings account provides you with the opportunity to exclude from your Montana adjusted gross income up to $3,000 plus accumulated interest or other earnings on these funds annually.

If you are married filing jointly with your spouse or married filing separately with your spouse, both of you can qualify for your own Montana first-time home buyer savings account and you each can exclude up to $3,000 plus accumulated interest or other earnings on this principal annually. To qualify for this exclusion, you will need to establish a separate or joint account with your spouse and contribute to your account(s) prior to purchasing your first-time home. If you file your income tax return separately with your spouse and if you have established a joint first-time home buyer savings account with your spouse, you cannot take this exclusion. Therefore, we recommend that you and your spouse establish separate first-time home buyer savings accounts instead of a jointly held account. These separate accounts will qualify both of you for the $3,000 annual exclusion whether you file jointly or separately with your spouse.

Once these funds are excluded from Montana adjusted gross income, they can be withdrawn only for the down payment and allowable closing costs for purchasing your single-family residence in Montana. Examples of eligible expenses include down payment, closing costs, realtor’s fees, appraisal costs, credit history report, points, prorated property taxes and loan origination fees. If you withdraw any of these funds for other purposes, they are subject to tax in the year that they are withdrawn and they also may be subject to a 10% penalty if they are withdrawn on any day other than the last business day of the year.

For further instructions on the Montana fi rst-time home buyer savings account see Montana Forms FTB and FTB-P. When you claim this exclusion, you will have to attach a copy of Montana Form FTB to your income tax return.

Line 20 – Exempt Family Education Savings Account Deposits and Earnings.

When you determine your Montana adjusted gross income, you can subtract from your federal adjusted gross income the lesser of the contributions that you made during 2008 to one or more Montana family education savings accounts or $3,000. If you are married, both you and your spouse are entitled to exclude up to $3,000 for contributions that you made to one or more Montana family education savings accounts. This exclusion is allowed only for contributions that you make to a Montana family education savings account that is owned by you, your spouse, your child or stepchild as long as your child or stepchild is a Montana resident. You can not exclude contributions made to another state or private family education saving program.

Withdrawals of your contributions and earnings from a Montana family education savings account are not taxable to you if you withdraw them to pay for qualified higher educational expense defined under federal law. If you withdraw these contributions for purposes other than to pay for qualified higher educational expenses, they are subject to a recapture tax of 6.9%, which should be reported on Montana Form 2, line 52.

To establish your Montana family education savings account or for additional information, call the Montana Family Education Savings Program at (800) 888-2723 or visit their website at montana.collegesavings.com.

Line 21 – Exempt Farm and Ranch Risk Management Account Deposits.

When you determine your Montana adjusted gross income, you can subtract from your federal adjusted gross income the lesser of 20% of the net income that is attributable to your agricultural business or $20,000 per year that you deposited into your Montana farm and ranch risk management trust account. This account is designed to be used as a risk management tool for your individual or family farm corporation’s agricultural business. It is established as a Montana trust with your financial institution as the trustee.

Amounts that you contributed to your farm and ranch risk management account that were excluded from your Montana adjusted gross income in prior years are taxable to you and should be included in your Montana adjusted gross income when you distribute your funds. Amounts that you contributed to your farm and ranch risk management account that are not distributed before the last business day on the fifth year from the date that this contribution was deposited are considered distributed and are assessed a 10% penalty on the amount of tax resulting from the farm and ranch risk management account principal. For further instructions about the Montana farm and ranch risk management account, see Montana Form FRM. When you claim this exclusion, you will need to attach a copy of Montana Form FRM to your income tax return.

Line 22 – Subtraction to Federal Taxable Social Security/Tier I Railroad Retirement.

Your social security benefits taxable to Montana may be different from the amount of taxable benefits that you reported on Form 2, line 20b. You should determine your Montana taxable social security benefits by completing Montana Worksheet VIII, found on page 55 of these instructions.

After you have completed your social security worksheet and find that your social security benefits taxable to Montana are less than those that you reported on Form 2, line 20b, enter that difference as a subtraction from federal adjusted gross income on this line. If your social security benefits are greater than those that you reported on Form 2, line 20b, you should report that difference as an addition to federal adjusted gross income on your Form 2, Schedule I, line 5.

Line 23 – Subtraction for Federal Taxable Tier II Railroad Retirement Benefits.

When you determine your Montana adjusted gross income, you can subtract your taxable Tier II Railroad Retirement benefi ts included on your Montana Form 2, line 16b from your federal adjusted gross income. Your taxable pension and annuity income may include your taxable portion of Tier II Railroad Retirement benefits that are paid by the railroad retirement board. These benefits are 100% exempt from Montana income tax.

Line 24 – Passive Loss Carryover Exclusion Adjustment.

Prior to tax year 2007, married taxpayers who filed a joint federal return, but filed separate Montana returns, were required to recompute the amount of allowable passive loss. This may have resulted in a larger passive loss carryover for state purposes. Beginning with the 2007 tax year, married taxpayers fi ling separate Montana returns are allowed to claim the same amount of passive loss allowed using the federal rules for a married couple filing a joint return. If you have state passive loss carryover from a previous tax year that you can now use under the federal rules, report the adjustment on this line.

Line 25 – Capital Loss Carryover Adjustment.

Prior to tax year 2007, married taxpayers who filed a joint federal return, but filed separate Montana returns, were only allowed to claim a capital loss of $1,500. This may have resulted in a larger capital loss carryover for state purposes. Beginning with the 2007 tax year, married taxpayers filing separate Montana returns are allowed to claim the same amount of capital loss allowed using the federal rules for a married couple filing a joint return. If you have state capital loss carryover from a previous tax year that was previously absorbed on your federal return, report the adjustment on this line. The total capital losses that can be claimed is still limited to $3,000, so a married couple cannot each claim $3,000.

Line 26 – Subtraction of Sole Proprietor for Allocation of Compensation to Spouse.

If you are a sole proprietor reporting net income on your federal Forms C or F, you have to report the full amount of your income in column A or B when you determine your federal adjusted gross income on Form 2. However, if your spouse regularly and systematically provides substantial personal services in the operations of your business and is not paid a salary or wage, you can allocate a reasonable amount of compensation to your spouse. This allocation has to be based on an amount that is equivalent to the services that your spouse provides and is considered taxable income to your spouse. This allocation will reduce your taxable income as the sole proprietor of the business.

Services that your spouse provides for operating your household, or services that are incidental to your operations, cannot be used as a basis for allocating income to your spouse. When you claim this reduction to income, you should be prepared to provide us with verification of those services provided and the substantial contribution made by your spouse.

On this line, subtract from your federal adjusted gross income the amount of income allocated to your spouse that is reported by your spouse as an addition to federal adjusted gross income on Schedule I, line 6 in his or her column.

Line 27 – Montana Net Operating Loss Carryover.

The Montana net operating loss carryover that you reported on your Form 2, line 21 may be different from the amount of your federal net operating loss carryover. You should record the amount of the federal net operating loss carryover that you reported on your Form 2, line 21 on Schedule I, line 12 and then compute your Montana net operating loss carryover using Montana Form NOL. Report on this line your Montana net operating loss from Montana Form NOL.

If you have a 2008 Montana net operating loss, generally you are required to first carry back this net operating loss to the two tax years preceding the loss year and then carry forward the balance of your 2008 net operating loss 20 years following the loss year. The federal special carryback rules apply for farm net operating losses and casualty losses. You can elect to forgo the carryback of your 2008 net operating loss and carry forward that loss.

In order to forgo your carry back, you will have to make an election on Montana Form NOL by April 15, 2009, or, if you have a valid extension, by October 15, 2009. Once you have made this election, it is irrevocable and you will not be able to reverse your election and carry back your 2008 net operating loss.

If you are carrying forward a net operating loss that occurred prior to January 1, 1999, use Montana Form NOL-Pre-99 to determine your carryover amount.

Line 28 – 40% Capital Gain Exclusion for Pre-1987 Installment Sales.

If you have an installment sale(s) of a capital asset(s) that you entered into before January 1, 1987, you may be allowed to exclude 40% of this capital gain from your federal adjusted gross income when you determine your Montana adjusted gross income. Complete Worksheet III, found on page 52, to determine your capital gain exclusion and then report the amount here.

Line 29 – Subtraction for Business Related Expenses for Purchasing Recycled Material.

When you determine your Montana adjusted gross income, you can subtract from your federal adjusted gross income 10% of the expenses that your business paid for purchasing recycled products. This deduction is allowed only to businesses within Montana. It applies to products purchased that contain recycled material at a level consistent with industry standards and/or consistent with the standards established by the federal Environmental Protection Agency. If you are a shareholder in an S corporation, a partner in a partnership, or a member or manager of a limited liability company, the share of this additional deduction allowed for your entity is based on the same proportion that you used to report your income or loss from your ownership in that entity for Montana income tax purposes.

Line 30 – Subtraction for Sales of Land to Beginning Farmers.

When you determine your Montana adjusted gross income, you can subtract from your federal adjusted gross income 100% of your income or capital gain (up to a maximum of $50,000) that you recognized from the sale to a beginning farmer of at least 80 acres or more of land at 9% or less interest on a long-term contract. To qualify for this deduction, you need to apply to and be approved by the Agricultural Loan Authority of the Montana Department of Agriculture. You will need to attach a copy of this approval to your individual income tax return. To learn more about the Montana Beginning Farm/Ranch Loan Program, you can call the agricultural finance program manager of the Montana Department of Agriculture at (406) 444-2402 or visit the website at agr.mt.gov/business/bfrprog.asp.

Line 31 – Subtraction for Larger Federal Estate and Trust Taxable Distribution.

Differences between Montana law and federal law may mean that the Montana taxable distribution that you received from an estate or trust is less than your federal taxable distribution from the same estate or trust. If so, the difference is a subtraction from federal adjusted gross income, and you should report it on this line.

Line 32 – Subtraction for Wage Deduction Reduced by the Federal Targeted Jobs Credit.

When you determine your Montana adjusted gross income, you can subtract from your federal adjusted gross income all wages and salaries paid by your business that were reduced for federal income tax purposes because of the fact that you applied for the federal targeted jobs credit on your federal income tax return. This additional deduction should be claimed in the tax year that you paid the wages, using the salaries that you used to calculate your federal targeted jobs credit.

If you are a shareholder in an S corporation, a partner in a partnership, or a member or manager of a limited liability company, this additional deduction should first be applied at the entity level to determine the entity’s Montana income or loss. For Montana tax purposes, your share of this additional deduction applied at the entity level is based on the same proportion that you used to report the income or losses of your ownership in the entity.

Line 33 – Subtraction for Certain Gains Recognized by a Liquidating Corporation.

When you determine your Montana adjusted gross income, you can subtract from your federal adjusted gross income that portion of your gain from the liquidation of a reporting corporation to the extent that this gain is included in the gross income of the liquidating corporation’s Montana corporate license tax return.

Line 34 – Other Subtractions.

Enter any other subtractions to federal adjusted gross income not described in lines 1 through 33. For example, if you received a death benefit payment from the Montana Department of Military Affairs because you are the survivor of a member of the National Guard who died while on state active duty orders, that amount is exempt from state taxes in Montana. Enter the amount that was included in your federal adjusted gross income.

 

General Information Schedule III

You should use Schedule III to calculate your itemized deductions, but remember that your Montana itemized deductions may be different from your federal itemized deductions. There are federal deductions that are not allowed on your Montana income tax return and state deductions that are allowed only on the Montana income tax return.

If you are married and you are filing separately on the same form or on separate forms, you should apply the following rules:

• Both spouses should either claim the standard deduction or itemize their deductions. You are not allowed to claim one method for one spouse and another method for the other spouse.
• Deductions that are attributable to only one spouse have to be claimed by that spouse. This includes, for example, your federal income tax withheld and your employee business expenses reported on federal Form 2106.
• Payments made from accounts owned by both spouses and that pertain to both spouses can be allocated to either spouse in any proportional amount.

Line 1 – Medical and Dental Expenses.

Enter your medical and dental expenses paid in 2008 after you have deducted from these expenses any payments that you received from your insurance company or other sources. These expenses are the same medical and dental expenses that are allowed under the Internal Revenue Code with the exception of the following expenses that are not deductible on line 1:

• medical insurance and long-term care insurance premiums paid in 2008 that are claimed as a deduction on Schedule III, lines 5 and 6
• health insurance premiums that are paid by your employer and are excluded from federal adjusted gross income in determining Montana adjusted gross income on Schedule II, line 16
• medical and dental expenses paid with funds withdrawn from your Montana medical care savings account

Lines 2 and 3

Your medical and dental expenses reported on Schedule III, line 1, should be reduced by 7.5% of your Montana adjusted gross income. Enter on line 2, the amount that you reported on Form 2, line 41. Multiply the amount on line 2 by 7.5% (0.075) and enter the result on line 3.

Line 4 – Deductible Medical and Dental Expenses.

Subtract line 3 from line 1 and enter the result on line 4, but do not enter an amount less than zero. This is your allowable deduction for medical and dental expenses.

Line 5 – Medical Insurance Premiums.

If you pay your own medical insurance premiums for coverage for yourself and your family, you may be eligible to deduct 100% of these medical insurance premiums. To determine whether you can deduct 100% of your medical insurance premiums, you have to meet the following criteria:

• Your premiums have to be paid for health and medical insurance coverage. Your life insurance premiums are not deductible.
• Your premiums cannot have been paid through a federal or state medical care savings account, such as the federal Health Savings Account or the Montana Medical Care Savings Account.
• Your premiums cannot have been paid through an employer health benefit cafeteria plan in which your premium payments are considered “pre-taxed” payment and therefore not subject to federal or state income tax withholding, federal social security, or federal Medicare payments. If you are unsure whether your employer has a health benefit cafeteria plan, you may want to check with your employer’s payroll office to discover whether your medical insurance premiums are covered by a health benefit cafeteria plan.
• Your premiums cannot be deducted as a self- employed health insurance deduction on your Form 2, line 29, or as a subtraction to federal adjusted gross income on your Form 2, Schedule II, line 16.
• Your premiums cannot be deducted as Medicare A premiums from your social security benefits. However, Medicare B premiums that are deducted from your social security benefits are 100% deductible on this line.
• Medicare taxes that are withheld from your wages or paid as part of your self-employment tax are not deductible on this line.

Line 6 – Long-Term Care Insurance Premiums.

If you pay for long-term care insurance premiums, you may be eligible to deduct 100% of the long-term care insurance premiums that you paid. In order to deduct 100% of your long-term care insurance premiums, you have to meet the following criteria:

• Your premiums have to be for long-term care coverage primarily for any qualified long-term care service that provides for the necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative service and personal care that is required for a chronically ill individual who is under the prescribed care of a licensed health care practitioner.
• Your premiums that you paid were for long-term care for yourself, your dependents, your parents or your grandparents.
• Your premiums have not been deducted elsewhere on your tax return when you determined your Montana adjusted gross income.
• Your premiums were not considered as qualified elderly care expenses when you claimed the elderly care credit that you reported on Schedule V, line 8.

Lines 7a through 7e – Federal Income Tax Deduction.

Montana allows federal income taxes paid during the year as an itemized deduction. This does not include any state income taxes you may have paid to Montana or any other state even if you were able to deduct them on your federal return. Additionally, this does not include any self- employment taxes you have paid during the year.

As described below, the amount you can claim may be limited based on your fi ling status.

Complete lines 7a through 7e if you are electing to claim a deduction for federal income taxes paid in 2008.

Line 7a – Federal Income Tax Withheld.

Enter the total amount of federal income tax withheld that was reported to you on your federal Forms W-2 and/or 1099. If you are married filing separately with your spouse, your federal income tax withheld should be reported by the spouse who earned the income. Do not include in this total the amount of the self-employment tax that you paid.

Line 7b – Federal Estimated Tax Payment Paid in 2008.

Enter the total amount of the federal estimated income tax payments that you made in 2008. When you claim federal estimated tax payments, you should attach a copy of your federal Form 1040 or 1040A, pages 1 and 2.

Line 7c – 2007 Federal Income Taxes Paid in 2008.

Enter the balance of the total amount of the 2007 federal income tax that you paid in 2008.

Line 7d – Additional Back Year Federal Income Taxes Paid in 2008.

Enter the total amount of additional back year federal income taxes that you paid in 2008. For example, you may have paid additional 2006 federal income taxes in 2008.

Line 7e – Federal Economic Stimulus Package Rebate.

Enter the federal economic stimulus payment you received in 2008.

The economic stimulus payment you received in tax year 2008 is not taxable for federal or state income tax purposes. Please note however that if you itemize your deductions for state income tax purposes for tax year 2008, your federal income taxes paid deduction may be reduced because of this rebate.

Here are a couple of scenarios to help you determine if the federal tax rebate will impact your Montana income tax situation. Please keep in mind that the maximum allowable deduction for federal income taxes paid for Montana individual income tax purposes is $5,000 for single, head of household, or married filing separately, and $10,000 for married fi ling jointly.

• If your itemized deduction for federal income taxes paid is below the threshold for your filing status, your deduction for federal income taxes paid on your state tax return will be reduced by the amount of the rebate.
• If your itemized deduction for federal income taxes paid exceeds the threshold for your fi ling status, your deduction for federal taxes paid on your state tax return most likely will not be impacted because your deduction has already surpassed the maximum allowable amount. The exception would be if the federal tax rebate decreases the amount of your itemized deduction so that it now falls below the threshold for your fi ling status.

Line 7f – Federal Income Tax.

Add lines 7a through 7d and then subtract line 7e. If the result is greater than $10,000 and you file your Montana return jointly with your spouse, or the result is greater than $5,000 and you file your return using another filing status, the following limitations apply. If the limitations do not apply, enter the result but not less than zero.

Your federal tax deduction is limited as follows:

• If your filing status is single, married fi ling separately or head of household, you should deduct the lesser of $5,000 or the sum of lines 7a through 7d minus line 7e. If you are married filing separately on the same form or on separate forms, you each are limited to the $5,000 federal tax deduction and you cannot arbitrarily allocate this deduction between spouses. 2008 Montana Individual Income Tax Form 2 Schedule Instructions Page 34
• If you file your Montana income tax return jointly with your spouse, your federal income tax deduction is limited to the lesser of $10,000 or the sum of lines 7a through 7d minus line 7e.

Line 8 – Local Income Taxes Paid in 2008.

Enter any local income taxes that you paid in 2008. No city in Montana imposes a local income tax so a Montana resident would be unlikely to take this deduction.

Line 9 – Real Estate Taxes Paid in 2008.

Enter any real estate taxes that you paid in 2008 on real estate that you own and that was not used for business. If you qualify and then apply for the elderly homeowner/renter credit, do not confuse this amount with the amount of your property tax billed that is used to determine the amount of your elderly homeowner/renter credit. See Montana Form 2EC for information on the Montana elderly homeowner/ renter credit.

Line 10 – Personal Property Taxes Paid in 2008.

Enter any personal property taxes that you paid in 2008. In order to claim this deduction, these personal property taxes have to be based on value and charged on a yearly basis.

Your motor vehicle taxes that are based on the vehicle’s value are considered a personal property tax and are deductible on this line. Your motor vehicle fees that are not based on the vehicle’s value are not deductible with the exception of the Montana light vehicle registration fee that is deductible—even though it is based not on the vehicle’s value, but on the age of the vehicle. However, any light vehicle registration fee that you pay to another state is not deductible on your Montana return. The taxes and fees that are listed on your Montana vehicle registration receipt that are deductible on this line include codes 14-COOPT and 61-LVREG.

Line 11 – Other Deductible Taxes.

Enter any other deductible taxes that you paid in 2008 and that you did not report on lines 7a through 10. When you claim these other deductible taxes, list on this line the type and amount of tax that you paid.

Taxes you may be able to deduct include state and local sales taxes, generation skipping transfer taxes imposed on income distributions, and taxes paid to a foreign country. Please note that you can only deduct state and local sales taxes and foreign taxes on your Montana return if you elected to claim them as a deduction on your federal return. Also, none of the resort, accommodations or similar taxes collected in Montana qualify as a general sales tax under the federal definitions so they cannot be deducted.

You cannot take a deduction on your Montana individual income tax return for the following taxes that you paid in 2008: state income, federal excise, social security, Medicare, gasoline, lodging, alcoholic beverage, cigarette, tobacco, or selective sales taxes. Also, you cannot take a deduction for certain license fees paid in 2008—such as hunting, fishing or driver’s license fees.

Line 12 – Home Mortgage Interest.

Enter your home mortgage interest and points allowed by federal law that were reported to you on your federal Form 1098.

Line 13 – Home Mortgage Interest Not Reported on Federal Form 1098

Enter any home mortgage interest that you paid that was not reported on your federal Form 1098. If you bought your home from another person, write that person’s name, social security number and address in the space provided.

Line 14 – Points Not Reported to You on Federal Form 1098.

Enter any points that you paid that were not reported to you on federal Form 1098.

Line 15 – Qualified Mortgage Insurance Premiums.

Individuals who entered into a contract issued after December 31, 2006 for qualified mortgage insurance are allowed to claim the premiums paid during the year as an itemized deduction. Qualified mortgage insurance means insurance provided by the Veterans Administration, the Federal Housing Administration, the Rural Housing Administration or private mortgage insurance. In order to be eligible, the loan must have been issued after 2006 for you to buy or build your primary residence and the loan must be secured by that residence. Insurance on a loan not used to build or buy a residence such as an equity loan used to consolidate debt is not eligible even if the loan is secured by your residence. Mortgage insurance premiums you paid or accrued after December 31, 2006, or that are properly allocable to any period after December 31, 2006 are deductible as home mortgage interest.

The deduction amount you can claim on your Montana tax return is the same amount you can claim on your federal tax return. If you did not itemize your deductions on your federal return, complete the Qualifi ed Mortgage Insurance Premium Worksheet on page 53 to determine the amount you can deduct. Married taxpayers filing separately in Montana may allocate the total allowable amount between both spouses.

Line 16 – Investment Interest.

Enter the investment interest deduction that you computed on your federal Form 4952. If you and your spouse are fi ling separately, you should compute your investment interest deduction on federal Form 4952 separately. You cannot use your interest expense that is related to exempt income when you compute your investment interest deduction.

Line 17 – Contributions Made by Cash or Check.

The contributions allowed as a deduction in computing your net income for Montana income tax purposes are those same contributions allowed as a deduction for federal income tax purposes—with the following exceptions:

• Your contributions made in 2008 to the Montana veterans’ service special revenue account, the Montana state veterans’ cemetery program, or the surcharge for the purchasing of the Montana patriotic specialty license plate are included as an itemized deduction on your Montana income tax return as long as you did not already include these contributions as part of your federal contribution deduction. For further instructions about this contribution, see Montana Form VT. This form is available at mt.gov/revenue.
• When you apply the federal 50%, 30% and 20% contribution limitations, you should use your Montana adjusted gross income instead of your federal adjusted gross income when you determine your contributions that are allowed.
• Any portion of a contribution that you used to calculate your qualified endowment tax credit cannot also be claimed as a contribution deduction.
• Any portion of a contribution that you used to calculate your developmental disability account contribution cannot also be claimed as a contribution deduction.

Enter your contributions made by cash or check on this line.

Line 18 – Contributions Made Other Than by Cash or Check.

Your non-cash contributions allowed as a deduction for Montana income tax purposes are those same non-cash contributions that are allowed as a deduction for federal income tax purposes—with the following exceptions:

• When you apply the federal 50%, 30% and 20% contribution limitations, you should use your Montana adjusted gross income instead of your federal adjusted gross income when you determine your contribution that is allowed.
• Any portion of a contribution that you used to calculate your qualified endowment tax credit cannot also be claimed as a contribution deduction. Enter your non-cash contributions on this line.

Line 19 – Contribution Carryover From the Prior Year.

Enter any contribution carryover amounts that you were not allowed to deduct in an earlier year because they exceeded your Montana adjusted gross income limitation.

Line 20 – Child and Dependent Care Expense.

If you pay for household or dependent care services for a child under the age of 15, or for a disabled dependent while you are searching for gainful employment, or while you and your spouse both were at work, you can qualify for a child and dependent care expense deduction.

To qualify for this deduction, you have to maintain a household for a child under the age of 15 or for a dependent or spouse who is unable to care for himself or herself. You also have to meet the following income level requirements.

If you are married and filing separately on the same form with your spouse, your deduction has to be divided equally between both spouses. If you are married and filing separately on separate forms, or your spouse is not filing, you cannot qualify for this deduction.

If you are a licensed and registered daycare operator who operates a family daycare home or a group daycare home and if you care for your own child in addition to at least one other unrelated child, you can deduct the employment related expenses considered to have been paid by you for the care of your own child.

For further information on the child and dependent care expense deduction, see the instructions on Montana Form 2441M. When you claim this deduction, complete Montana Form 2441M and attach a copy of it to your Montana income tax return.

Line 21 – Casualty and Theft Loss.

If you have a casualty and/or theft loss, you should complete federal Form 4684 to figure the amount of the Montana loss that you can enter on this line. To determine your casualty and/or theft loss, you should use your Montana adjusted gross income in place of the federal adjusted gross income. And if you are filing separately with your spouse, you each should complete a separate federal Form 4684 to determine the amount of your separate casualty and/or theft loss.

Line 22 – Unreimbursed Employee Business Expenses.

When you deduct unreimbursed employee business expenses on your Montana income tax return, you should use the same expenses that are allowed on your federal income tax return. To claim these expenses, complete federal Form 2106 or 2106EZ. Because you can claim only your own unreimbursed employee business expenses and not those of your spouse, when you and your spouse file your returns separately, you should report your own employee business expenses in the column that is associated with your income and expenses.

Line 23 – Other Expenses.

Enter other expenses that are allowed on your federal income tax return. Examples of these expenses include, but are not limited to, your tax preparation fee, certain legal and accounting fees, clerical help, office rent, and custodial fees.

Line 24

Add lines 22 and 23; enter the result on this line.

Lines 25 and 26

Your unreimbursed employee business expenses and other expenses reported on lines 22 and 23 are deductible only to the extent that these expenses exceed 2% of your Montana adjusted gross income. Enter on line 25 the amount that you reported on Form 2, line 41. Multiply the amount on line 25 by 2% (0.02) and enter the result on line 26.

Line 27

Subtract line 26 from line 24 and enter the result on this line, but not less than zero. This is the amount of your unreimbursed employee business expenses and other expenses that are deductible in computing your net income.

Line 28

Political Contributions. When you compute your net income, you can take a deduction for political contributions that you made during the year. These contributions are limited to a total of $100 for yourself and, if married, a total of $100 for your spouse. To qualify for this deduction, your contribution of money has to be made to:

• an individual who is a candidate for nomination or election to any federal, state or local public office in a primary, general or special election;
• any committee, association or organization set up to campaign for the nomination or election to any federal, state or local public office in a primary, general or special election;
• a national committee or a national political party;
• a state committee of a national political party; or
• a local committee of a national political party.

Line 29 – Other Miscellaneous Deductions Not Subject to 2% of Montana Adjusted Gross Income.

When you compute your net income, you can take a deduction for other miscellaneous expenses that are not subject to 2% of your Montana adjusted gross income.

These deductions are the same deductions that are allowed on your federal income tax return. They include a deduction for expenses paid in purchasing organic fertilizer and inorganic fertilizer that is produced as a by- product of mining or industrial operations in Montana. Other deductions you may be allowed are per capita livestock fees imposed for enforcement of the livestock laws of the state and for the payment of bounties on wild animals.

Line 30 – Gambling Losses.

You can take a deduction for gambling losses that you incurred during the year. These losses are allowed only to the extent of the gambling winnings that you have reported on Form 2, line 21. If you are married and you and your spouse are filing your Montana return separately, the spouse who claims the gambling winnings on Form 2, line 21 should report the gambling losses on this line.

Line 32 – Itemized Deduction Worksheet.

If the Montana adjusted gross income that you reported on Form 2, line 41 is more than $159,950 (or more than $79,975 when you are married filing your returns separately), your total itemized deductions reported on line 31 may be limited. Complete Worksheet VI on page 53 in these instructions to determine the portion of the itemized deductions that you reported on line 31 that are not deductible because you exceeded the Montana adjusted gross income limitations above.

Line 33 – Allowable Itemized Deductions.

The amount of your allowable itemized deductions is the result of subtracting line 32, which is the total of your disallowed itemized deductions, from line 31, which is your total itemized deductions. Enter this result on Form 2, line 42.

 

General Information Schedule IV

If you are a nonresident or a part-year resident, you are subject to the same filing requirements as a resident unless you are specifically exempt. If you are unsure of your residency status, see page 3 of the instructions to determine whether you are a full-year resident, nonresident, or a part-year resident of Montana for individual income tax purposes. These instructions will also show how you can determine your legal residence for Montana income tax purposes.

When you file your Montana income tax return as a nonresident or as a part-year resident, you should complete your Montana Form 2, lines 1 through 48, and Form 2, Schedules I, II and III as though you were a resident reporting your total Montana and non- Montana source income. After you have determined your preliminary resident tax after capital gains tax credit on Form 2, line 48, you should complete Form 2, Schedule IV to determine your nonresident, part-year resident tax after capital gains tax credit.

As a part-year resident you are considered a resident of Montana once you establish your Montana residency or, up until the time you relinquish your Montana residency and establish residency in another state. For the period of time that you are considered a resident, all of your income is taxable to Montana no matter where you earn it. For the period of time that you are considered a nonresident, only your income that is considered Montana source income is taxable to Montana.

For example: Suppose you relocated to Montana and established your residency July 1, 2008. You are filing your 2008 Montana income tax return as a part-year resident of Montana reporting wages earned both within and outside of Montana, along with interest and dividends that you earned throughout the year. For the period of January 1 through June 30, your wages, interest and dividends are not considered Montana source income. The wages, interest and dividends that you received on or after July 1, 2008 are Montana source income and are taxable to Montana.

If you are a nonresident servicemember of the United States armed forces living in Montana solely by reason of compliance with your military orders, the Servicemembers Civil Relief Act allows you and your spouse to maintain your original state of residency and it does not require you to establish residency in Montana. Any compensation that you received for military service is not Montana source income and should not be used to determine your nonresident, part-year resident tax after capital gain tax credit. Refer to the instructions for Form 2, Schedule II, line 9 on page 27, for the treatment of your military income.

Reporting Your Montana Source Income

Lines 1 through 16

In general, as a nonresident of Montana, your Montana source income is all the income that you received for work that you performed in Montana, income that you received from real or personal property that is located in Montana, and income that you received from a business conducted in Montana.

In general, as a part-year resident, for the part of the year that you are a nonresident, your Montana source income is all the income that you received for work that you performed in Montana, income that you received from real or personal property that is located in Montana, and income that you received from a business conducted in Montana.

Only report amounts included in the calculation of adjusted gross income for the current year when you complete Schedule IV. A loss incurred in a prior year affects the amounts reported only if it is included in a carryover amount that reduces income in the current year.

For the part of the year that you are a resident all of your income that you receive—no matter where you earn it—is Montana source income.

Line 1 – Montana Source Wages, Salaries, Tips, etc.

If you are a nonresident, enter that portion of your wages, salaries, tips and other compensation for services that you performed in Montana and that are included in your total on Form 2, line 7.

If you are a part-year resident, enter all of your wages, salaries, tips and other compensation that you earned during the part of the year that you were a resident. Also include, where applicable, that portion of your wages, salaries, tips and other compensation that you received for services in Montana during the part of the year that you were a nonresident.

Line 2 – Montana Source Taxable Interest.

If you are a nonresident, enter that portion of your interest that you received from an installment sale of real property in Montana. Also include any interest that you received from your business or commercial property that is located in Montana and that is included in your total on Form 2, line 8a. As a nonresident, you do not have to include as Montana source income all the interest that you received from financial institutions, notes, dividends on capital stock, royalties from patents and copyrights, and other income from intangible property.

If you are a part-year resident, enter all of the interest that you received or accrued during the period of time that you were a resident and that is included in the totals on Form 2, line 8a and Form 2, Schedule I, line 1.

Line 3 – Montana Source Ordinary Dividends.

If you are a nonresident, generally your dividends are not considered Montana source income and should not be included on this line.

If you are a part-year resident, enter all of the dividends that you received or accrued during the period of time that you were a Montana resident in 2008 and that are included in your total on Form 2, line 9a.

Line 4 – Montana Source Taxable Refunds or Other Recoveries.

If you are a nonresident or a part-year resident and you have a taxable federal income tax refund or a recovery of an amount deducted in 2007 that is reported on Form 2, Schedule I, line 3, enter that portion of your federal income tax refund and/or recovery that is determined to be Montana source income.

To determine that portion of your federal refund and/or recovery that is Montana source income, use the ratio of your Montana source income to total income that was reported on your 2007 Schedule IV, line 19. If you did not have any Montana source income in 2007 and you were not required to file a 2007 Montana income tax return, your federal income tax refund and/or recovery is not Montana source income.

If, in 2008, you received a taxable federal refund and/ or recovery of a prior year deduction from a year other than tax year 2007, use the ratio of your Montana source income to total income that was determined in the year of the deduction.

Line 5 – Montana Source Alimony Received.

If you are a nonresident, the alimony that you reported on Form 2, line 11 is not Montana source income and is not taxable to Montana.

If you are a part-year resident, enter that portion of the alimony that you received during the period that you were a Montana resident in 2008 and that is included in your federal adjusted gross income on Form 2, line 11.

Line 6 – Montana Source Business Income or (Loss).

If you are a nonresident, enter the portion of your net income or loss that is reported on Form 2, line 12 that you received from a trade, business, profession, or occupation that you carried on in Montana.

If you are a part-year resident, enter the net income or loss received from any trade, business, profession or occupation during the period you were a resident that is included in your total on Form 2, line 12. Also include, where applicable, the portion of any net income or loss you received from a trade, business, profession or occupation that is carried on in Montana during the period of time that you were a nonresident.

Line 7 – Montana Source Capital Gain or (Loss).

If you are a nonresident, enter the portion of your gains or losses included in your total on Form 2, line 13 that you received on the sale or transfer of your tangible property located in Montana or for your tangible property used or held in connection with your trade, business or occupation that is carried on in Montana.

If you are a part-year resident, enter all of your gains or losses included in your total on Form 2, line 13, received during the part of the year that you were a resident. Also, where applicable, include the portion of any gains or losses received during the part of the year in which you were a nonresident for the sale or transfer of your tangible property located in Montana or for the sale or transfer of any tangible property used or held in connection with your trade, business or occupation that is carried on in Montana.

Line 8 – Montana Source Other Gains or (Losses).

If you are a nonresident, enter the portion of your gains or losses included in your total on Form 2, line 14 related to what you received from the sale or exchange of business property located in Montana and reported on your federal Form 4797.

If you are a part-year resident, enter all of the gains and losses included in your total on Form 2, line 14, received during the part of the year that you were a resident. Also include, where applicable, the portion of any gains or losses from the sale or exchange of business property located in Montana during the period of time that you were a nonresident.

Line 9 – Montana Source Taxable IRA Distribution.

If you are a nonresident, the IRA distribution that you reported on Form 2, line 15b is not Montana source income and is not taxable to Montana.

If you are a part-year resident, enter all the taxable IRA distributions included in your total on Form 2, line 15b received during the part of the year that you were a resident.

Line 10 – Montana Source Taxable Pension and Annuities.

If you are a nonresident, the taxable pension and annuities that you reported on Form 2, line 16b are not Montana source income and are not taxable to Montana.

If you are a part-year resident, enter all of the taxable pensions and annuities included in your total on Form 2, line 16b for the part of the year that you were a resident.

Line 11 – Montana Source Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts, etc.

If you are a nonresident, enter the portion of the following income or losses that you included in your total on Form 2, line 17:

• Net rental income or loss from real property and tangible personal property located in Montana
• Net royalties from real property and tangible personal property to the extent that this property is used in Montana
• Patent royalties to the extent that the income that you received is for the production, fabrication, manufacturing, or other processing in Montana, or the patented product is produced in Montana
• Net copyright royalties to the extent that the printing and other publication originated in Montana
• Partnership income derived from a trade, business, occupation or profession carried on in Montana
• S corporation income derived from a trade, business, occupation or profession carried on in Montana
• Trust income derived from a trade, business, occupation or profession carried on in Montana

If you are a part-year resident, enter all of the income or losses included in your total on Form 2, line 17, received during the part of the year that you were a resident and, where applicable, include the portion of any income or loss attributable to Montana (as described in the preceding paragraph) during the period of time that you were a nonresident.

Line 12 – Montana Source Farm Income or Loss.

If you are a nonresident, enter the portion of your net income or loss reported on Form 2, line 18, received from the farming activity carried on in Montana.

If you are a part-year resident, enter your net income or loss included in your total on Form 2, line 18, received from any farming activity during the period that you were a resident. Also include, where applicable, the portion of any net income or loss received from the farming activity carried on in Montana during the period of time that you were a nonresident.

Line 13 – Montana Source Taxable Social Security Benefits.

If you are a nonresident, the taxable social security benefits that you reported on Form 2, line 20b are not Montana source income and are not taxable to Montana.

If you are a part-year resident, enter only the portion of the taxable social security benefits received during the part of the year that you were a resident and that are included in your total on Form 2, line 20b. You should calculate your portion of taxable social security benefits by dividing the amount reported on Form 2, line 20b, by 12 months and then multiply this result by the number of months you were a resident of Montana in 2008. You will need to complete the social security Worksheet VIII on page 55 in order to determine your Montana source taxable social security benefits.

Line 14 – Montana Source Other Income.

If you are a nonresident, enter any other amounts of your income not included above that are derived from Montana sources. This includes, but is not limited to:

• Montana lottery winnings
• Non-employee compensation

Line 15 – Montana Source Additions to Income Reported on Form 2, Schedule I.

If you are a nonresident, enter any amount of income not included above that you reported on Form 2, Schedule I derived from Montana sources. This includes, but is not limited to:

• Federal tax refunds. If you received a federal income tax refund in 2008 and are now required to include this refund as income on Form 2, Schedule I, line 3, a portion of this refund may be considered Montana source income. To determine this portion, multiply the amount of the taxable federal refund that you reported on Form 2, Schedule I, line 3 by the percentage that you reported on Form 2, Schedule IV, line 19 of your 2007 Montana individual income tax return.
• Recapture of a prior year tax benefit. If you received a refund in 2008 of an amount that you claimed as a deduction in a prior year, you are now required to include this amount as income on Form 2, Schedule I, line 4. A portion of this refund may be considered Montana source income. To determine this portion, multiply the amount on your Form 2, Schedule I, line 4 by the percentage of your Montana source income divided by your total income from all sources that you reported on Form 2, Schedule IV, for the year in which you claimed this deduction.
• Medical care savings account nonqualified withdrawals. The amount that you deposited into your Montana medical care savings account while you were a resident maintains its character as Montana source income as long as you don’t withdraw it to pay for eligible medical expenses prior to the time that you establish your residency elsewhere.
• First-time home buyer savings account nonqualifi ed withdrawals. The amount that you deposited into your Montana first-time home buyer savings account while you were a resident maintains its character as Montana source income. If you have not used these funds to purchase a home in Montana prior to establishing residency elsewhere, these funds are Montana source income and taxable to Montana.

Line 17 – Total Income from All Sources.

For both nonresidents and part-year residents, enter the sum of Form 2, lines 22 and 38.

If you are a nonresident military service person who has Montana source income, you should add the amounts on Form 2, lines 22 and 38 and then subtract from this total the nonresident exempt military compensation that you reported on Form 2, Schedule II, line 9.

Line 21 – Nonresident, Part-Year Resident Tax after Capital Gains Tax Credit.

After you have finished completing Form 2, Schedule IV and have determined the amount of your nonresident, part-year resident tax after capital gains tax credit, enter that amount on Form 2, line 48a and then proceed to line 49. The instructions for lines 49 through 72 begin on page 17.

 

General Information Schedule V

There are three categories of credits available on your Montana individual income tax return. We have listed the 27 Montana tax credits available to you under these three categories to assist you in managing these credits. With the exception of the capital gains credit, which is required to be applied before any other credit (refer to Form 2, line 47), you are not required to apply any of the other tax credits in a particular order.

• Nonrefundable single-year credits. Your nonrefundable single-year credits can only be used to offset your 2008 resident, nonresident, or part- year resident tax after capital gains credit and cannot reduce your tax liability below zero. The unused portion of your nonrefundable single-year credits that exceeded your 2008 income tax liability cannot be carried forward or carried backward to other tax years.
• Nonrefundable carryover credit. Your nonrefundable carryover credits can be used to offset your 2008 resident, nonresident, or part-year resident tax after capital gains credit. These credits cannot reduce your tax liability below zero. Your excess nonrefundable carryover credits that were not applied against your 2008 income tax liability can be carried and used to offset future year tax liabilities.
• Refundable credits. Your refundable credits are applied against your income tax liability with any unused credit refunded to you.

Nonrefundable Single-Year Credits, Lines 1 through 11

Line 1 – Credit for Income Tax Paid to Another State or Country.

You can use this credit only if you are filing as a full-year or part-year resident.

If you are a full-year resident and you paid an income tax to another state or country on income that is also taxable to Montana, you may be entitled to a credit against your Montana income tax liability for these income taxes paid to another state or country. If you claimed the foreign tax credit on your federal tax return, you can claim this credit for foreign taxes on your Montana tax return only if you have unused federal credit that is not eligible to be carried back or carried forward to another tax year. If you are a resident and have unused federal credit or paid tax to another state, you will need to complete Form 2, Schedule VI to determine your available credit.

If you are a part-year resident and you paid an income tax to another state or country on income that is also taxable to Montana and if you included it as Montana source income on Form 2, Schedule IV, lines 1 through 16, you may be entitled to a credit against your Montana part-year resident income tax liability for these income taxes paid to another state or country. If you claimed the foreign tax credit on your federal tax return, you can claim this credit for foreign taxes on your Montana tax return only if you have unused federal credit that is not eligible to be carried back or carried forward to another tax year. If you are a part-year resident and have unused federal credit or paid tax to another state, you will need to complete Form 2, Schedule VII to determine your available credit.

If you are a shareholder of an S corporation or a partner in a partnership and your S corporation or partnership pays an income tax to another state or country, you can claim a credit for your share of these income taxes paid by the entity. In order for you to claim this credit, however, the income tax paid by the S corporation or partnership has to be measured by and imposed on net income. This credit also applies to excise taxes or franchise taxes that are paid by the S corporation or partnership as long as they are imposed on and measured by net income. However, you are not allowed to use other taxes paid by your S corporation or partnership such as, but not limited to, franchise or license taxes or fees that are not imposed on or measured by net income, gross receipt taxes or gross sales taxes. When you claim this credit for the taxes paid by your S corporation or partnership, you will have to add back to your federal adjusted gross income in determining your Montana adjusted gross income, on Form 2, Schedule I, line 13, your share of the S corporation’s or partnership’s federal tax deduction that is included in your total on Form 2, line 17. This is required whether or not your S corporation or partnership separately or non-separately stated the income tax deduction on your federal Form K-1.

If you are required to file an income tax return in more than one state or country and you are entitled to this credit, you will have to complete a separate Form 2, Schedule VI or VII for each state or country in which you filed an income tax return and paid an income tax on income that is also taxed to Montana.

You will not be entitled to this credit if the other state or country in which you have filed an income tax return has allowed you a credit against the taxes that they have imposed on your net income because you are also subject to tax on the same income by Montana.

When calculating this credit on Form 2, Schedule VI, you cannot include in your income tax liability paid to the other state or country on line 4, any penalties and interest that you paid to the other state or country.

Line 2 – College Contribution Credit.

You can claim a credit against your income tax liability for contributions that you made in 2008 to a general endowment fund of the Montana University System foundations, or a Montana private college or its foundation. Your credit is equal to 10% of the contribution that you made with a maximum credit allowed of $500.

In order to qualify for this credit, your contribution has to be made to a Montana college or university that offers a baccalaureate degree level education program. In addition to this credit, your contribution may also be claimed as an itemized deduction on Form 2, Schedule III, line 18.

For further instructions on the college contribution credit, and to calculate this credit, see Montana Form CC. When you claim this credit, you will have to attach a copy of Montana Form CC to your income tax return.

Line 3 – Qualified Endowment Credit.

You can claim a credit against your income tax liability for contributions made to a qualified Montana endowment held by a Montana corporation or established organization that is tax-exempt under 26 USC 501(c)(3) or is held by a bank or trust company in Montana on behalf of the tax-exempt organization.

Your credit is equal to 40% of the present value of a planned gift that you personally made during the year to the qualified Montana endowment. If you are a shareholder in an S corporation, a partner in a partnership, or a member or manager of a limited liability company and your entity made a contribution to a qualified Montana endowment, you are entitled to a credit equal to 20% of your share of the entity’s contribution. In no case can your credit be larger than $10,000 for your contribution and, when applicable, $10,000 for your spouse. When claiming this credit, you cannot claim a charitable contribution deduction on Form 2, Schedule III for the amount of the contribution that you used to calculate this credit.

For further instructions on the qualified endowment credit, and to calculate this credit, see Montana Form QEC. Visit the Governor’s Task Force on Endowed Philanthropy website at endowmontana.org to learn more about the endowments statewide. When you claim this credit, you will have to attach a copy of Montana Form QEC to your income tax return.

Line 4 – Energy Conservation Installation Credit.

If you are a resident of Montana, you can claim a credit against your income tax liability for energy conservation investments that you made to your home or other buildings. Your credit is equal to 25% of your expenses for a maximum credit of up to $500 for the capital investments you made to your home or another building for energy conservation purposes or for the installation or replacement of a hot water heater or household heating or cooling system. If you are married, your spouse may also qualify for a credit of up to $500 as long as you both made qualifying capital investments.

In order to qualify for this credit, you will have to show that the investments make your home or building use energy more efficiently. It does not mean simply switching to an energy source that is less expensive or free (investments of this nature may qualify for the alternative energy system credit). If you are unable to provide this documentation and verification, you will not be allowed to take this credit.

For further instructions and a list of investments that qualify for the energy conservation credit, see Montana Form ENRG-C. In addition, please refer to our website at mt.gov/revenue and look for the “Energy Related Tax Relief” icon for information such as specific examples of what investments may or may not qualify. When you claim this credit, you will have to attach a copy of Montana Form ENRG-C to your income tax return.

Line 5 – Alternative Fuel Credit.

You can claim a credit against your income tax liability for the cost of converting your motor vehicle to operate on an alternative fuel. Your credit is equal to 50% of the cost to convert your motor vehicle for a maximum credit of up to $1,000.

In order to qualify for this credit, your motor vehicle has to be licensed in Montana and the conversion has to be from gasoline to an alternative fuel, such as natural gas, liquefied petroleum gas, liquefied natural gas, hydrogen, electricity, or other combinations. This credit should not be confused with the federal deduction for the purchase of a qualified clean-air vehicle.

For further instructions on the alternative fuel credit and to calculate this credit, see Montana Form AFCR. When you claim this credit, you will have to attach a copy of Montana Form AFCR to your income tax return.

Line 6 – Rural Physician’s Credit.

You can claim a credit against your income tax liability if you are a licensed physician practicing in a rural area. Your credit is up to $5,000 a year and is limited to $20,000 for four consecutive years.

In order to qualify for the entire $20,000 credit, you are required to locate or relocate your principal practice to a rural area and provide medical services to the general public for a period of eight years. The rural area that you service cannot be within a 30 mile radius of a hospital that has at least 60 beds.

You are required to begin your practice at least nine months before the end of your tax year to be eligible for the credit your first year and you cannot claim the credit in the year that you cease your practice. If you close your practice in the rural area within four years of claiming this credit, you will be required to repay to the state the amount of the credit that you claimed in the prior year(s). See instructions on page 17 for Form 2, line 52 for the repayment of the rural physician’s credit.

When taking this credit, attach to your Montana income tax return a statement providing the following information:

• Date your practice began
• Street address and city of the location where you began your practice
• Professional area of your medical practice, for example “family practice”
• Location of the nearest hospital

Important: The 2007 Montana Legislature enacted legislation impacting this credit. As a result of the changes, 2007 was the last year you could have established a practice that would qualify for the credit. You can continue to claim the credit after 2007, but only if you began your practice before January 1, 2008.

Line 7 – Health Insurance for Uninsured Montanans Credit.

You can claim a credit against your income tax liability if your business provides health insurance coverage for its employees. Your credit is a percentage of the premium payments that you made throughout the year for a maximum credit of up to $3,000 per year.

In order to qualify for this credit, as an employer you should meet the following criteria:

• You have been in business in Montana for at least 12 months.
• You employ 20 or fewer employees who work at least 20 hours a week.
• You pay at least 50% of each of your employees’ health insurance premiums.

Your credit is limited to a maximum of 10 employees and should include small employer group health insurance under the Small Employer Health Insurance Availability Act.

Please note: If you are using insurance premiums to calculate the Insure Montana small business health credit (which is a separate credit), these premium payments cannot be used to calculate the health insurance for this credit.

For further instructions on the health insurance for uninsured Montanans credit, and to calculate this credit, see Montana Form HI. When you claim this credit, you will have to attach a copy of Montana Form HI to your income tax return.

Line 8 – Elderly Care Credit.

You can claim a credit against your income tax liability for paying certain expenses in order to provide care to an elderly family member. Your credit cannot exceed $10,000 in one tax year for the care of two or more family members.

In order to qualify for this credit, you need to care for an elderly family member who is at least 65 years of age, who has been determined to be disabled by the Social Security Administration, and who has a family income of $15,000 or less if not married, or $30,000 or less if married.

For further instructions on the elderly care credit and to calculate this credit, see Montana Form ECC. When you claim this credit, you will have to attach a copy of Montana Form ECC to your income tax return.

Line 9 – Recycle Credit.

You can claim a credit against your income tax liability for the investment that your business makes in depreciable equipment or machinery that you use to collect, process or manufacture a product from reclaimed material. Your credit is equal to 25% of the first $250,000 invested in the property, 15% of the next $250,000 invested, and 5% of the next $500,000 invested. You are not entitled to any additional credit for property that exceeds $1 million.

For further instruction on the recycle credit, and to calculate this credit, see Montana Form RCYL. When you claim this credit, you will have to attach a copy of Montana Form RCYL to your income tax return.

Line 10 – Oilseed Crushing and Biodiesel/ Biolubricant Production Facility Credit.

You can claim a credit for the cost of investments in qualifying depreciable property used to crush oilseed crops for the purpose of making biodiesel fuel or biolubricant, or used to construct or equip a facility in Montana to be used for producing biodiesel or biolubricant. This credit can be carried over for seven succeeding years if the facility is crushing oilseed during that tax period. If the facility for which the credit is claimed ceases operations for a period of 12 consecutive months within five years of claiming the credit, the credit is subject to recapture. For detailed instructions, see Form OSC. If this credit is claimed, attach a copy of Form OSC to the tax return.

Line 11 – Biodiesel Blending and Storage Credit.

You can claim a credit for the cost of investments in depreciable property used for storing or blending biodiesel made from Montana products with petroleum diesel for sale. This credit can be carried over for seven succeeding tax years if the facility is blending or storing biodiesel for blending. If the facility ceases blending biodiesel for sale for a period of 12 consecutive months within five years of claiming the credit, the credit is subject to recapture. If the facility’s biodiesel sales are not at least 2% of all diesel sales by the end of the third year after the credit is initially claimed, the credit is subject to recapture. For detailed instructions, see Form BBSC. If this credit is claimed, attach a copy of Form BBSC to the tax return.

Nonrefundable Carryover Credits, Lines 12 through 24

Line 12 – Contractor’s Gross Receipts Tax Credit.

You can claim a credit against your income tax liability for the public contractor’s gross receipts tax that your business paid. Your credit is the gross receipts tax you paid throughout the year after you have applied your gross receipts tax against your personal property taxes.

If you report your income from your contracts on the percentage-of-completion method, your credit will need to be pro-rated accordingly. Your credit cannot exceed your tax liability and any credit balance remaining can be carried forward for up to five subsequent years.

When you claim this credit, attach to your income tax return a schedule that identifies the contractor’s name, the date and the amount of the contract, the primary contractor, the subcontractor and the location of the job.

Line 13 – Geothermal Systems Credit.

If you are a resident of Montana, you can claim a credit against your income tax liability for the cost of purchasing and installing a geothermal system in your principal home. The amount of the credit cannot exceed $1,500 and is applied in the year that you installed your geothermal system. The balance of your credit that is not used can be carried forward and applied against subsequent income tax liabilities for a period of seven years.

For further instructions on the geothermal systems credit, and to calculate this credit, see Montana Form ENRG-A. When you claim this credit, you will have to attach a copy of Montana Form ENRG-A to your income tax return.

Line 14 – Alternative Energy Systems Credit.

If you are a resident of Montana, you can claim a credit against your income tax liability for the cost of purchasing and installing an energy system that uses a recognized nonfossil form of energy such as, but not limited to, solar energy, wind energy, solid waste, and organic waste in your principal home. Your credit cannot exceed $500 per taxpayer and any balance of your credit that is not used in 2008 can be carried forward and applied to future income tax liabilities for a period of four succeeding tax years.

If you are a resident of Montana, you can claim a credit against your income tax liability for the cost of purchasing and installing an energy system using a low emission wood or biomass combustion device, such as a pellet or wood stove in your principal home. Your credit cannot exceed $500 per taxpayer and any balance of your credit that is not used in 2008 can be carried forward and applied to future income tax liabilities for a period of four succeeding tax years.

For further instructions on the alternative energy system credit, and to calculate this credit, see Montana Form ENRG-B. When you claim this credit, you will have to attach a copy of Montana Form ENRG-B to your income tax return.

Line 15 – Alternative Energy Production Credit.

You can claim a credit against your income tax liability for an investment of $5,000 or more that your business makes in depreciable property for the use of a commercial system or a net metering system that is located in Montana and that generates energy by means of an alternative renewable energy source.

The amount of your credit is limited to 35% of the eligible cost associated with the purchasing, installing and upgrading of the alternative energy system. Your credit is further limited in that it can only be applied against the tax liability due as a consequence of the alternative energy system generating taxable or net income. Your credit cannot exceed that portion of your tax liability that results from taxable or net income generated as a result of the system. Your unused credit can be carried forward and applied to future income tax liabilities for a period of seven years. An exception to the seven-year carryforward period applies when your investment is located within the exterior boundaries of a Montana Indian reservation.

For further instructions on the alternative energy production credit and to calculate this credit, see Montana Form AEPC. When you claim this credit, you will have to attach a copy of Montana Form AEPC to your income tax return.

Line 16 – Dependent Care Assistance Credit.

If you are an employer in Montana, you can claim a credit against your income tax liability for the amount that you paid or incurred during the year to provide dependent care assistance to your employees. There are three programs that are available to you that qualify for this credit, including:

• A dependent care assistance credit.
• A dependent care information and referral service credit.
• A day care facilities credit—In order to claim the credit under this program, the facility must have been placed in operation before January 1, 2006.

For further instructions about the amount of the credit that is available, the carry forward provisions and how to calculate these credits see Montana Form DCAC. When you claim these credits, you will have to attach a copy of Montana Form DCAC to your income tax return.

Line 17 – Historic Property Preservation Credit.

You can claim a credit against your income tax liability equal to 25% of your federal rehabilitation credit that is provided in IRC Section 47(a)(2) for the preservation of a qualified historic building. When you claim this credit, you will have to attach a copy of your federal Form 3468 to your income tax return.

As an alternative to the percentage of your federal rehabilitation credit, you can claim a credit against your income tax liability equal to 20% of the cost of creating a conservation easement and for the diminishing value of the historic property, including its buildings and structures that resulted from placing a conservation easement on the property.

Line 18 – Infrastructure Users Fee Credit.

You can claim a credit against your income tax liability for the infrastructure users fee paid to a local government. Your credit is calculated based on the infrastructure fees paid by your new business to a local government.

When you claim this credit, you will have to attach a statement from the county certifying the amount of the infrastructure users fee that you paid and the timeliness of your payment. You can carry back three years or carry forward seven years any of your unused infrastructure users fee credit.

Line 19 – Empowerment Zone Credit.

You can claim a credit against your income tax liability if you are an employer who has a business in an empowerment zone. The credit is based on the number of qualifying new employees and is equal to $500 for each qualifying employee in the first year of employment, $1,000 for each qualifying employee in the second year of employment, and $1,500 for each qualifying employee in the third year of employment. To be eligible for this credit, you have to be certified by the Montana Department of Labor and Industry.

Your credit can be carried back three years and carried forward seven years. The entire amount of your credit that is not used in the year that you earned it has to be carried first to the earliest tax year that the credit can be applied and then to each succeeding tax year.

Line 20 – Increasing Research Activities Credit.

You can claim a credit against your income tax liability for the increase in qualified research expenses and basic research payments that your business conducted in Montana. Your credit is determined in accordance with Section 41 of the Internal Revenue Code, except that the percentage rate for your Montana credit is 5%.

For further instructions on the increasing research activities credit, and to calculate this credit, see Montana Form RSCH. When you claim this credit, you will have to attach a copy of Montana Form RSCH to your income tax return.

Line 21 – Mineral Exploration Incentive Credit.

You can claim a credit against your income tax liability for the certified expenditures for mining exploration activities involving mineral and coal deposits. Your credit cannot exceed 50% of that portion of your tax liability that is related to the production from the mining operation for which the exploration activity occurred.

In determining your credit, your qualifi ed expenditures include those costs that you incurred for activities that directly support the exploration at a specifi c site.

For further instructions on the mineral exploration incentive credit, see Montana Form MINE-CRED. To qualify for this credit, you will first have to submit a request to us detailing the work performed and the expenses incurred. This request should be made within 60 days following the end of the calendar year. The department has until September 30 to certify your expenses.

Line 22 – Film Employment Production Credit.

You can claim a credit against your income tax liability for employing residents of Montana in a state-certified production. The credit is equal to the sum of 14% of the first $50,000 or less that was compensated to each Montana resident who was employed in a state-certified production.

When you claim this credit, you should make a one-time election by either:

• applying the credit against your income tax liability by reporting it on Form 2, Schedule V, line 22 and carrying forward any unused credit to be applied against your income tax liability in subsequent years, or
• applying the credit against your income tax liability by reporting it on Form 2, Schedule V, line 26 in which any unused credit is refunded to you.

The qualified compensation used to calculate the credit cannot be reported as a deduction when calculating Montana taxable income.Please see instructions for Form 2, Schedule I, line 16 (Other Additions) on page 25.

For further instructions on the film employment production credit and to calculate this credit, see Montana Form FPC. When you claim this credit, you will have to attach a copy of Montana Form FPC to your income tax return.

Line 23 – Adoption Credit.

You can claim a credit against your income tax liability if you fi nalized the adoption of an eligible child in 2008. An eligible child is:

• any child under age 18, or
• any disabled person physically or mentally unable to take care of himself or herself.

The amount of the credit is $1,000 per child. If the amount of the credit exceeds your tax liability for 2008, you can carry forward the unused credit to the next five tax years.

For Montana purposes, this carry forward applies only to adoptions that were finalized on or after January 1, 2007. Therefore, you are not eligible for this credit if you finalized an adoption before January 1, 2007 but have unused federal adoption credit that you are carrying forward. Attach a copy of federal Form 8839.

Refundable Credits, Lines 25 through 30

Line 25 – Elderly Homeowner/Renter Credit.

The Montana elderly homeowner/renter credit is a property tax relief program that provides you with a refundable credit if you are age 62 or older, have resided in Montana for at least nine months during the year, occupied a Montana residence for at least six months during the year, and your gross household income is less than $45,000.

For further instructions on the elderly homeowner/renter credit, and to calculate this credit, see Form 2EC and Form 2EC instructions on page 47.

Line 26 – Film Employment Production Credit.

You can receive a refundable film employment production credit if you made the one time election to apply the credit against your income tax liability and requested a refund of the unused credit by reporting it on this line. You can also elect to carry forward your credit. If you have made this election, see Form 2, Schedule V, line 22 for further details and instructions.

The film employment production credit is equal to the sum of 14% of the first $50,000 or less that was compensated to each Montana resident who was employed in a statecertifi ed production.

The qualified compensation used to calculate the credit cannot be reported as a deduction when calculating Montana taxable income. Please see instructions for Form 2, Schedule I, line 16 (Other Additions) on page 25.

For further instructions on the film employment production credit and to calculate this credit, see Montana Form FPC. When you claim this credit, you will have to attach a copy of Montana Form FPC to your income tax return.

Line 27 – Film Qualified Expenditures Credit.

You can receive a refundable fi lm qualified expenditures credit for expenditures made in Montana in connection with your state-certified production. Your credit is equal to 9% of the total qualified expenses that you incurred in connection with your production.

The qualified expenditures used to calculate the credit cannot be reported as a deduction when calculating Montana taxable income. Please see instructions for Form 2, Schedule I, line 16 (Other Additions) on page 25.

For further instructions on the fi lm qualifi ed expenditures credit, and to calculate this credit, see Montana Form FPC. When you claim this credit, you will have to attach a copy of Montana Form FPC to your income tax return.

Line 28 – Insure Montana Small Business Health Insurance Credit.

If you were the owner of a business that received a tax credit from the Insure Montana Small Business Health Insurance program, enter the amount of credit to which you are entitled. The amount of credit you may claim is the total credit amount issued to the business multiplied by your ownership percentage. For example, if you were a 50% owner and the business received $6,000 in tax credit, you are entitled to claim $3,000 ($6,000 x 50% (0.5)).

Enter the federal employer identification number (FEIN) of the business which received the credit in the space provided. If you were the owner of more than one company receiving the credit, enter the FEIN of the company that received the highest amount of credit. Attach a copy of the most recent certificate from the State Auditor’s Office providing the amount of tax credit the business received.

Additionally, the premiums paid for these policies are not allowed as a deduction. Please see instructions for Form 2, Schedule I, line 16 (Other Additions) on page 25. NEWNEW Line 29 – Temporary Emergency Lodging Credit. For tax years beginning on or after January 1, 2008, a refundable tax credit is available for licensed establishments that provide short-term emergency lodging under the Temporary Emergency Lodging Program. The program helps provide lodging for individuals or families who have been displaced from their residence and have been referred to the establishment by a charitable organization approved by the Montana Department of Public Health and Human Services. Please visit their website at http://www.dphhs.mt.gov/ PHSD/Food-consumer/emergency-lodging.shtml for additional information regarding participation in this program.

The credit is $30 for each day of lodging provided by the establishment with a maximum of five nights’ lodging for each individual. An individual may claim the credit if they are the owner of the establishment or they have an ownership interest in the partnership or S corporation that owns the establishment.

For further instructions on the temporary emergency lodging credit, and to calculate this credit, see Montana Form TELC. When you claim this credit, you will have to attach a copy of Montana Form TELC to your income tax return.

 

General Information Schedule VII

See the instruction for Form 2, Schedule V, line 1 on page 40 of this instruction booklet and the instructions on Form 2, Schedules VI and VII to determine the amount of your credit for income tax paid to another state or country on income that is also taxed to Montana.

General Information Schedule VIII

Complete Form 2, Schedule VIII only if you and/or your spouse were required to complete for federal income tax purposes one or more of the federal forms that are identified on this schedule. If you are required to complete this schedule because you have answered yes to one or more of the statements, you will need to attach a copy of your federal income tax return, Form 1040 to your Montana income tax return.

For further information on the reporting of special transactions see Form 2, Schedule VIII.