Montana taxes for early retirees: no sales tax, cheaper capital gains, and a rate cut in progress

By Tom, CPA · Updated October 29, 2026

TL;DR: For 2026 Montana taxes ordinary income at 4.7% up to $95,000 of taxable income for married couples ($47,500 single) and 5.65% above that. Long-term capital gains get their own rates of 3% and 4.1%. Montana starts from federal taxable income, so IRA withdrawals, pensions and the federally taxable part of Social Security are taxed, with a subtraction for people 65 and older. There's no general sales tax.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Montana is Big Sky Country, home of grizzlies, fly fishing and a state with no general sales tax, which means the only thing more expensive than you expected is the house. For early retirees, Montana also has something most states don't: a separate, lower tax rate for long-term capital gains.

This guide covers the 2026 Montana rules: the new HB 337 brackets, the capital gains rates, what's taxed, the 65+ subtraction, property tax, estate tax, and estimated payments. Our guides are Rancher Rita, who retired at 50 to raise alpacas that do not pay rent, and Bozeman Bob, who moved from California and keeps asking where the sales tax is.

CPA Warning Label: Montana now starts from federal taxable income, so anything the IRS taxes, including Roth conversions and taxable Social Security, flows straight onto your Montana return unless a specific subtraction applies.

Income tax rates for 2026 and 2027

House Bill 337 expanded the 4.7% bracket and cut the top rate. The Montana Department of Revenue's tables:

These brackets apply to taxable income excluding net long-term capital gains, which have their own schedule. The 2026 Form 2 instructions were still marked draft when we checked, so confirm against the final version.

Capital gains: 3% and 4.1%

Montana taxes net long-term capital gains at 3% to the extent they fit within the first bracket after your ordinary income, and 4.1% above that. For a married couple in 2026, the 3% band is $95,000 minus your ordinary taxable income. If ordinary income alone reaches $95,000, every dollar of long-term gain is taxed at 4.1%. Qualified dividends are treated as ordinary income in Montana, not capital gains, so they get the 4.7% and 5.65% rates. Short-term gains are ordinary income too.

Selling the alpacas? Livestock aside, the point is that a brokerage account is tax-efficient here, just not tax-free.

What Montana taxes: starting from federal taxable income

Montana's Form 2 starts with federal AGI and federal taxable income, then applies Montana additions and subtractions. Practically, that means:

• IRA and 401(k) withdrawals and Roth conversions are taxed as ordinary income.
• Pensions are taxed, unless a specific Montana subtraction applies.
• Social Security is taxed to the extent it's in federal taxable income. There's no blanket exemption, so the federal formula that taxes up to 85% of benefits matters here.
• Interest from federal bonds, such as Treasuries, is excluded, as federal law requires.
• The standard deduction is effectively the federal one, since you start from federal taxable income. For 2026 that's $32,200 married filing jointly and $16,100 single.

The big Montana-specific break for retirees is the age subtraction: on the 2025 Form 2, taxpayers 65 and older subtract $5,660, or $11,320 for a married couple filing jointly when both are 65 or older. That figure is indexed, so check the 2026 form for the new amount. Early retirees under 65 don't get it.

Illustration: Rita's 2026 Montana tax

Illustration: Rancher Rita and her husband, both 55, file jointly for 2026. Assumptions: $60,000 of traditional IRA withdrawals, $40,000 of long-term capital gains, the 2026 federal standard deduction of $32,200, no Montana additions or subtractions. Federal taxable income is $67,800, and that's also Montana taxable income. Ordinary income is $60,000 minus $32,200, or $27,800, taxed at 4.7%: $1,306.60. The 3% capital gains band is $95,000 minus $27,800, or $67,200, so all $40,000 of gains are taxed at 3%: $1,200. Total Montana tax: $2,506.60.

If Rita had instead converted an extra $50,000 to a Roth, ordinary income would rise to $77,800, still under $95,000, so the conversion would cost 4.7% ($2,350). Her gains would still fit in the 3% band up to $17,200, then the remaining $22,800 would be taxed at 4.1%. Stacking matters: ordinary income goes first, then gains fill in on top.

Property tax, sales tax and estate tax

Sales tax: Montana has no general sales tax, according to the Department of Revenue. Some resort communities and specific goods and services, like lodging, have their own taxes, but the everyday grocery-and-hardware-store sales tax doesn't exist. For a retiree spending $70,000 a year, that can be worth several thousand dollars compared with a 7% state.

Property tax: Montana leans heavily on property taxes, which are assessed locally and have been a hot political topic as home values jumped. The state has changed residential property tax rules and relief programs in recent sessions, so check the Department of Revenue's property tax pages and your county for the current rate, any homestead or primary-residence treatment, and low-income assistance.

Estate and inheritance tax: Montana has neither, so only the federal estate tax could apply, at $15 million per person for 2026.

Residency and estimated payments

A Montana resident is taxed on all income. Part-year residents and nonresidents compute tax on Montana-source income using Schedule II. If you move to Montana mid-year to start retirement, keep good records of the move date, the sale of your old home and when you changed your driver's license and voter registration; our residency change guide covers what states look at.

According to Publication 1, you must make estimated payments when the tax you'll owe after withholding and credits is more than $500, in four installments due on the 15th of April, June, September and January. Early retirees with no wages usually owe estimates unless they withhold from IRA distributions.

Common Montana mistakes early retirees make

• Treating qualified dividends like capital gains. Federally they share the capital gains rates. In Montana they're ordinary income at 4.7% or 5.65%. A $1.2 million portfolio yielding 1.5% produces $18,000 of dividends, which is $846 of Montana tax at 4.7%, not $540 at 3%.
• Forgetting gains stack on top. The 3% band isn't a separate allowance. A big Roth conversion shrinks it dollar for dollar and pushes gains into the 4.1% rate.
• Assuming no sales tax means low taxes overall. Montana still has an income tax with a 5.65% top rate for 2026 and meaningful property taxes. The total depends on your mix of spending, income and house.
• Using old brackets. The 2024 and 2025 brackets were much narrower. Calculators that haven't been updated for HB 337 will overstate your 2026 tax.
• Skipping estimates. Once you owe more than $500, the Department of Revenue expects quarterly payments, and the first one is due April 15.

Bob, meanwhile, has stopped looking for the sales tax and started looking for a snowblower. Neither is cheap.

Planning moves for an early retiree in Montana

• Fill the 3% band with gains. Keep ordinary income low and realize long-term gains; they're taxed at 3% until ordinary income plus gains reach the bracket line.
• Convert to Roth in 2027 and later, maybe. The 4.7% bracket widens to $130,000 for married couples in 2027, so conversions up to that line avoid the higher rate.
• Mind the federal Social Security formula. Since Montana follows federal taxable income, extra IRA income that makes more benefits federally taxable raises your Montana tax too. See our tax torpedo guide.
• Turn 65. The age subtraction is the closest thing Montana has to a retirement exclusion.

Comparing states? See Washington, Utah and Colorado, then try the state tax move calculator.