Working Military Retirement Exemption

Montana resident working military retirees may be eligible to exempt a part of their military retirement income from Montana taxable income. The exemption also applies to resident beneficiaries receiving military survivor benefits.

Exemption Overview

  • 50% of the taxpayer’s military retirement income received from the Defense Finance and Accounting Service (DFAS), or
  • The amount of the Montana source income from:
    • Wages, salary, and tips from compensation performed in Montana
    • Net income from a trade or business in Montana
    • Net income from farming activities in Montana

Beneficiaries receiving military survivor benefits under the U.S. Department of Defense’s Survivor Benefit Plan can exempt up to 50% of their military survivor benefits. Eligible beneficiaries include spouses, eligible children, or an “insurable interest” as defined by U.S. Department of Defense. Military survivor benefits do not include death benefits.

Eligibility

The retirement income or survivor benefits must be received for service in:

  • U.S. Armed Forces
  • Army National Guard
  • Air National Guard
  • A U.S. Reserve Component

The retiree or beneficiary must have:

  • Become a resident after June 30, 2023, or
  • Been a resident before receiving military retirement income or survivor benefits and remained a resident thereafter

The exemption is not available to retirees that become nonresidents after receiving the exemption in a previous tax year.

For example, if a retiree becomes a resident in 2024, then becomes a resident of another state in 2026, the retiree is no longer eligible for the exemption, even if the retiree reestablishes residency in Montana in a later tax year.

  • Sarah – A military retiree who moved to Montana on August 1, 2023, to work for a business in Montana. Because she moved to Montana after June 30, 2023, she can exempt the lesser of half of her military retirement income or all of her wages earned from working at the business. 
  • Jack – He served at a military installation in Montana until December 31, 2022, when he retired. During his service he established residency in Montana. After his retirement, he opened a restaurant in the state. Because he established residency before July 1, 2023 and was a resident before he began receiving his military retirement, he is eligible for a deduction of the lesser of half of his military retirement or all of the income earned from his Montana restaurant.
  • Albert – A military retiree, he moved to Montana in 2021 to work for a business in Montana. He began receiving his military retirement in Georgia in 2020. Because he established residency before July 1, 2023 and was not a resident before receiving his retirement, he is not eligible for the deduction.
  • Jim – He receives military survivor benefits, moved to Montana on January 1, 2024. In addition to his survivor benefits, he receives income from owning a Montana business. Jim can only deduct half of his survivor benefits.

Deduction Limitations

The deduction can only be claimed for five consecutive years after meeting the eligibility requirements. For eligible retirees or beneficiaries who were residents before June 30, 2023, the exemption is available for five years after tax year 2024, which is tax year 2028. 

The deduction expires in tax year 2033.

How to Claim the Deduction

Claimants must attach the Form WMRE to the Montana Individual Income Tax Return (Form 2) to take the deduction.