Montana does tax military retirement pay as ordinary income, but a state exemption lets qualifying veterans subtract up to 50 percent of their military pension from Montana taxable income. The catch is in the name: it is the Working Military Retirement and Survivor Benefit Exemption, and for retirees it only applies if you also have Montana-source wage, business, or farming income.1Montana Department of Revenue. Working Military Retirement Exemption Fully retired veterans with no earned income in the state get no exemption and pay Montana tax on the full pension.
How the Exemption Actually Works
Montana created the subtraction through Senate Bill 104 in 2023, with the first tax year of eligibility being 2024.2Montana State Legislature. SB 104 Enrolled Bill The amount you can subtract is the lesser of two numbers: 50 percent of your military retirement pay, or your total Montana-source income from wages, a trade or business, or farming.3Montana State Legislature. Montana Code 15-30-2120
Two quick illustrations show how the cap works. A retiree with $60,000 in military retirement and $15,000 in Montana wages can exempt $15,000, because the wage figure is lower than half the pension. A retiree with the same pension but $40,000 in Montana wages gets the full $30,000 exemption, because now half the pension is the lower number. A retiree with the same pension and no Montana wages gets nothing.4Montana Department of Revenue. 2025 Montana Working Military Retirement and Survivor Benefit Exemption Form WMRE
That last point is the one most retirees miss. The exemption rewards working retirees. If you are drawing a pension and nothing else from Montana sources, your full military retirement income is taxed at Montana’s regular individual income tax rates.
Who Qualifies
The exemption covers retired members of the U.S. Armed Forces, the Army or Air National Guard of any state, and any reserve component. The retirement income must be paid by the Defense Finance and Accounting Service.1Montana Department of Revenue. Working Military Retirement Exemption
Residency Rules
You have to fit one of two residency pictures:
- You became a Montana resident on or after June 30, 2023, or
- You were already a Montana resident before July 1, 2023, and you first started receiving military retirement income while living in the state.
Veterans who were living somewhere else before July 2023 and were already drawing a pension before moving to Montana do not qualify.4Montana Department of Revenue. 2025 Montana Working Military Retirement and Survivor Benefit Exemption Form WMRE If you later leave Montana and become a nonresident, you lose eligibility and cannot pick it back up.3Montana State Legislature. Montana Code 15-30-2120
Five Consecutive Years
The exemption runs for five consecutive tax years from the first year you qualify.3Montana State Legislature. Montana Code 15-30-2120 Residents who were already in Montana before July 1, 2023 started the clock in tax year 2024, which makes 2028 their final eligible year.4Montana Department of Revenue. 2025 Montana Working Military Retirement and Survivor Benefit Exemption Form WMRE Newer residents start their own five-year count the first year they meet the requirements. There is no age restriction.
Survivor Benefit Recipients Get Easier Terms
Beneficiaries receiving payments under the Department of Defense Survivor Benefit Plan can exempt up to 50 percent of those benefits whether or not they have Montana wage income.5Montana Department of Revenue. Montana Working Military Retirement and Survivor Benefit Exemption – Form WMRE The working requirement does not apply to survivors. The residency rules and the five-year limit still do.3Montana State Legislature. Montana Code 15-30-2120 Military death benefits are a separate category and are not covered by this exemption.1Montana Department of Revenue. Working Military Retirement Exemption
How to Claim It
You claim the subtraction by completing Form WMRE and attaching it to your Montana Form 2 individual income tax return.4Montana Department of Revenue. 2025 Montana Working Military Retirement and Survivor Benefit Exemption Form WMRE For retirees, the calculation on the form runs in four steps:
- Line 1: your taxable military retirement income from box 2a of your 1099-R (distribution code 7 in box 7).6Internal Revenue Service. Instructions for Forms 1099-R and 5498
- Line 2: your total Montana-source wages, business income, or farming income.
- Line 3: Line 1 multiplied by 0.50.
- Line 4: the lesser of Line 2 or Line 3. That number is your exemption.
Part-year residents enter only the retirement income received and the wages earned while they were living in Montana. For survivor benefit recipients, the form skips the wage comparison and simply takes 50 percent of the survivor benefits received.
DFAS issues the 1099-R each year and makes it available through myPay.7Defense Finance and Accounting Service. Getting Your 1099-R Form 2 and Form WMRE are both on the Montana Department of Revenue website.8Montana Department of Revenue. Montana Individual Income Tax Return Form 2 Hold on to your DD-214 in case the Department of Revenue asks for proof of service.
What the Exemption Is Worth
For the 2026 tax year, Montana taxes individual income at two rates. Single filers pay 4.7 percent on income up to $47,500 and 5.65 percent above that; the thresholds for joint filers are $95,000.9Montana Department of Revenue. HB337 – 2026-2027 Montana Individual Income Tax Changes The top rate drops to 5.4 percent in tax year 2027.
Consider a single veteran with $48,000 in military retirement pay and $30,000 in Montana wages. Half the pension is $24,000, which is less than the $30,000 wage figure, so the exemption is $24,000. Depending on where that $24,000 falls in the brackets, the subtraction trims the Montana tax bill by roughly $1,128 to $1,356.
What the Exemption Does Not Cover
Three income streams veterans often lump together with retirement pay get different treatment, and it is worth being clear on each.
VA disability compensation. VA disability payments are already excluded from federal taxable income and therefore never appear on your Montana return.10MyArmyBenefits. Federal Taxes on Veterans Disability or Military Retirement Pensions There is no state exemption to claim because there is no state tax owed in the first place. If you receive both taxable retirement pay and tax-free disability compensation through concurrent receipt, only the taxable retirement portion on your 1099-R is eligible for the Montana exemption.
Thrift Savings Plan withdrawals. TSP distributions are not military retirement income from DFAS. They come on a separate 1099-R and are taxed as ordinary income by both the federal government and Montana, with no special state subtraction.1Montana Department of Revenue. Working Military Retirement Exemption A traditional TSP withdrawal before age 59½ may also carry a 10 percent federal early withdrawal penalty, though separating from service during or after the year you turn 55 is one of the recognized exceptions.11Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Combat zone pay. Pay earned in a designated combat zone is excluded from federal taxable income (fully for enlisted members, with a cap for commissioned officers), and because Montana starts from federal taxable income, that exclusion carries through to the state return automatically.12Internal Revenue Service. Tax Exclusion for Combat Service This is active-duty compensation, not pension income, and it is handled separately from the working military retirement exemption.