BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

 

In the matter of the amendment of ARM 42.4.301, 42.4.302, 42.4.303, 42.4.401, 42.4.402, 42.4.403, 42.4.404, 42.4.501, 42.4.502, 42.4.601, 42.4.602, 42.4.603, 42.4.702, 42.4.703 relating to individual taxpayer's tax credits

) ) ) ) ) )

NOTICE OF PUBLIC HEARING ON PROPOSED AMENDMENT

 

TO:  All Concerned Persons

 

1.  On April 22, 2010, at 11:00 a.m., a public hearing will be held in the (Third Floor) Reception Conference Room of the Sam W. Mitchell Building, at Helena, Montana, to consider the amendment of the above-stated rules.

Individuals planning to attend the hearing shall enter the building through the east doors of the Sam W. Mitchell Building, 125 North Roberts, Helena, Montana.

 

2.  The Department of Revenue will make reasonable accommodations for persons with disabilities who wish to participate in this public hearing or need an alternative accessible format of this notice.  If you require an accommodation, contact the Department of Revenue no later than 5:00 p.m., April 12, 2010, to advise us of the nature of the accommodation that you need.  Please contact Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-3696; or e-mail canderson@mt.gov.

 

3.  The rules proposed to be amended provide as follows, stricken matter interlined, new matter underlined:

 

42.4.301  DEFINITIONS  The following definitions apply to this subchapter:

(1)  remains the same.

(2)  "Gross household income" as defined under 15-30-171, 15-30-2337, MCA, is further defined as:

(a) through (4) remain the same.

 

AUTH: 15-30-305, 15-30-2620, MCA

IMP: 15-30-171, 15-30-172, 15-30-173, 15-30-176, 15-30-177, 15-30-178, 15-30-2337, 15-30-2338, 15-30-2340, MCA

 

            REASONABLE NECESSITY: The proposed amendment to ARM 42.4.301 is necessary to reflect the recodification of the statutes in Title 15, chapter 30, MCA, enacted by the 2009 Legislature in HB 24 (Ch. 147, L. 2009).

 

42.4.302  COMPUTATION OF RESIDENTIAL PROPERTY ELDERLY HOMEOWNER/RENTER TAX CREDIT FOR ELDERLY  (1)  When the taxpayer owns the dwelling but rents the land or owns the land and rents the dwelling, the taxpayer shall add the rent-equivalent tax paid on the rented property to the property tax billed on the owned property.  The total shall then be reduced as provided by 15-30-176, 15-30-2340, MCA.  The tax credit will be the reduced amount or $1,000, whichever is less.

(2) through (7) remain the same.

 

AUTH: 15-30-305, 15-30-2620, MCA

IMP: 15-30-176, 15-30-2340, 50-5-101, MCA

 

            REASONABLE NECESSITY:  The department is proposing to amend ARM 42.4.302 in order to match the name of the credit used on the Montana form where the credit is claimed.  This change will help the taxpayer find the rule that applies to the credit.  The amendment to the statutory authority and implementing cites is necessary to reflect the recodification of the statutes in Title 15, chapter 30, MCA, enacted by the 2009 Legislature in HB 24 (Ch. 147, L. 2009).

 

42.4.303  CLAIMING AN ELDERLY HOMEOWNER/RENTER TAX CREDIT

(1)  The elderly homeowner credit may be claimed by an eligible individual or, if an eligible individual dies before making a claim, by the personal representative of their estate, and must be made on Form form 2EC, Montana Elderly Homeowner/Renter Credit.

(2)  The time for, and manner of making, a claim for the credit depends on whether or not the qualified individual (or the personal representative for them) files an individual income tax return for the year for which the credit is claimed.

            (a)  If an eligible individual files or is required to file an individual income tax return for the year for which the credit is claimed, the claim must be filed with the return on or before the due date of the return, including extensions.  ARM 42.15.301 sets forth the rules for determining whether an individual is required to file a return.  If a return is made by or for an eligible individual without making a claim for the credit, the credit may be claimed by filing an amended return within five years after the due date of the return, not including extensions.

(b)  If an eligible individual is not required to, and does not, file an individual income tax return, no later than April 15th of the fifth year following the claim year the claim must be:

(i)  mailed to the department at the address set forth in ARM 42.1.101;

(ii)  or delivered to: the department at the

Department of Revenue

Sam W. Mitchell Building,

Third floor, 125 N.orth Roberts,

Helena, MT Montana no later than April 15th of the fifth year following the claim year.; or

(iii)  filed electronically through the department's web site at: revenue.mt.gov.

(c)  If an eligible individual is required to, but did not, file an individual income tax return the claim must be made by filing an individual income tax return with completed form 2EC as provided in (2)(a).

(d)  If the taxpayer claiming the credit files their tax return electronically, he or she represents that they have completed Form form 2EC and have all the required documentation.  The form and required documentation are tax records the taxpayer must retain and provide to the department on request.

(3)  The following are examples showing how this rule is applied:

(a)  Taxpayer is required to file an individual income tax return for 2003 2008 and, although eligible, neglects to claim the credit by filing Form form 2EC with their 2003 2008 individual income tax return which they file April 6, 2004 2009.  Taxpayer may claim the credit by filing an amended 2003 2008 individual income return with completed Form form 2EC on or before April 15, 2009 2014.

(b)  Taxpayer, who is not required to file an individual income tax return for 2003 2008, dies in February 2004 2009.  The taxpayer's Personal personal representative, appointed June 2004 2009, may at any time before April 15, 2009 2014, either file a 2003 2008 individual income tax return for the taxpayer with completed Form form 2EC or file Form form 2EC without filing a 2003 2008 return.

(c)  Taxpayer is required to, but does not file an individual income tax return for 2007 2009.  Taxpayer or, if the taxpayer has died, the personal representative of the taxpayer's estate, may claim the credit by filing a 2007 2009 individual income return with completed Form form 2EC on or before April 15, 2013 2015.

 

AUTH: 15-30-149, 15-30-305, 15-30-2609, 15-30-2620, MCA

IMP: 15-30-149, 15-30-174, 15-30-175, 15-30-2609, 15-30-2339, MCA

 

            REASONABLE NECESSITY:  The department is proposing to amend ARM 42.4.303 to update the tax years included in the examples, making the rule more relevant to the taxpayer.  In addition, the department would like to provide additional information regarding the name of the form that needs to be filed and the electronic filing provision now available to taxpayers.  Some language has been rewritten only to make the rule clearer for the taxpayer.  The amendment to the statutory authority and implementing cites is necessary to reflect the recodification of the statutes in Title 15, chapter 30, MCA, enacted by the 2009 Legislature in HB 24 (Ch. 147, L. 2009).

 

            42.4.401  DEFINITIONS  (1) through (5) remain the same.

 

            AUTH: 15-30-305, 15-30-2620, MCA

            IMP: 15-30-124, 15-30-2302, MCA

 

            REASONABLE NECESSITY:  The proposed amendment to ARM 42.4.401 is necessary to reflect the recodification of the statutes in Title 15, chapter 30, MCA, enacted by the 2009 Legislature in HB 24 (Ch. 147, L. 2009).

 

            42.4.402  CREDIT FOR INCOME TAXES PAID TO ANOTHER STATE OR COUNTRY  (1)  A Montana resident is allowed a nonrefundable credit against the resident's Montana income tax liability for:

            (a)  income taxes they paid to another state or foreign country on income which is also subject to Montana income tax;

            (b)  tax years beginning after December 31, 2000, the resident shareholder's pro rata share of income taxes paid by an S corporation in which the resident is a shareholder to another state or foreign country on income, which that is subject to Montana income tax as provided in Title 15, chapter 30, MCA; and

            (c)  tax years beginning after December 31, 2002, the resident partners' distributive share, stated separately or non-separately, of income taxes paid by a partnership, which is to another state or foreign country on income, which that is subject to Montana income tax as provided in Title 15, chapter 30, MCA.

            (2)  The credit is allowed under the following conditions and limitations:

            (a)  the credit is allowed only with respect to an income tax imposed by law and actually paid.  An income tax is a tax measured by and imposed on net income and, in the case of an S corporation or partnership, includes an excise tax or franchise tax that is imposed on and measured by the net income of the entity.  The credit is not allowed for other taxes such as, but not limited to, franchise or license taxes or fees not measured by net income, gross receipts taxes, gross sales taxes, capital stock taxes, or property, transaction, sales, or consumption taxes.  The credit is not allowed for penalty or interest paid in connection with an income tax;

            (b)  in the case of a taxpayer who either becomes or ceases to be a Montana resident during the taxable year, the credit is allowed only with respect to income earned during the fractional part of the year the taxpayer was a resident of this state;

            (c)  the credit is allowed only with respect to an income tax, which that the taxpayer does not claim as a deduction in determining Montana taxable income; and

            (d)  the credit is allowed only if the state or foreign country imposing the income tax liability does not allow the taxpayer a credit for Montana income tax liability incurred with respect to the income derived within such state or foreign country; and

            (e)  the credit is allowed for taxes paid to a foreign country only to the extent the taxes paid exceed either:

            (i)  the amount claimed under IRC section 904(a) plus any carryback and carryover amount allowed under IRC section 904(c); or

            (ii)  the amount claimed under IRC section 904(k).

            (3)  The credit against income taxes is claimed on the Montana tax return for the same year that the taxpayer reports the income associated with the tax paid to the other state or country.  Because the Montana credit is nonrefundable and any unused credit may not be used in another tax year, taxes that for federal income tax purposes are deemed paid or accrued in a carryback or carryover year must be removed before calculating the Montana foreign tax credit.

            (4)  If a taxpayer amends the amount of income reported to the other state or a foreign country on which the Montana credit was based, the taxpayer shall file an amended Montana tax return to recalculate the credit allowed.

 

            AUTH:  15-30-305, 15-30-2620, MCA

            IMP:  15-30-124, 15-30-2302, MCA

 

            REASONABLE NECESSITY:  The amendments to ARM 42.4.402 are necessary to provide for the application of the credit limitation imposed by the 2005 Montana Legislature when it amended 15-30-124 (15-30-2302 now), MCA.  The purpose of the rule is to carry out the legislative intent to ensure that there is fundamental fairness to all taxpayers by preventing some taxpayers from being able to deduct a credit twice, both federally and in Montana.  The rule provides that the Montana income tax credit for taxes paid to a foreign country cannot be claimed to the extent a foreign tax credit is claimed for federal income tax purposes.  The rule explains that a taxpayer needs to include federal carryback and carryover amounts in determining the limit for calculating the Montana credit.  This prevents income and credit mismatching – the Montana credit has no carryover feature and failure to include federal carryovers could result in multiple credit claims based on the same income.

The rule is also being amended to clarify the tax year in which the credit is claimed and to provide guidance when a taxpayer amends a return that changes the foreign tax on which the Montana credit was computed.

The amendment of the authority and implementing cites is necessary to reflect the recodification of the statutes in Title 15, chapter 30, MCA, enacted by the 2009 Legislature in HB 24 (Ch. 147, L. 2009).

 

            42.4.403  COMPUTATION OF CREDIT FOR TAX PAID TO ANOTHER STATE OR COUNTRY  (1)  The In determining the tax credit allowed, the following computations in this rule must be made separately for each state or foreign country's income tax with respect to which a credit is claimed:.

            (a)(2)  if If the claim for credit does not include the taxpayer's share of income tax paid to another state or country by an S corporation or partnership in which the taxpayer is a shareholder or partner:

            (i)(a)  determine the amount of income from taxable by the other state or foreign country that is included in Montana adjusted gross income (AGI), but do not include income that is exempt in Montana;

            (ii)(b)  determine the amount of tax paid to the other state or foreign country on income that is not exempt in Montana by multiplying the tax paid to the other state or foreign country by a fraction,:

            (i)  the numerator of which is the amount of income from taxable by the other state or foreign country that is included in Montana adjusted gross income AGI (excluding income exempt in Montana),; and

            (ii)  the denominator of which is the total amount of income from taxable by the other state or foreign country (including income exempt in Montana); and.

            (iii)(c)  multiply determine the proportionate amount of the Montana income tax attributable to income taxed by the other state or foreign country by multiplying the Montana income tax liability, as determined without the credit, by a fraction,:

            (i)  the numerator of which is the taxpayer's income from taxable by the other state or foreign country that is included in the taxpayer's Montana adjusted gross income AGI,; and

            (ii)  the denominator of which is the taxpayer's total Montana adjusted gross income AGI.

            (b)(d)  the allowable credit allowable is the lower of the:

            (i)  the amount of income tax reported and paid to the other state or foreign country;

            (ii)  the amount of the income tax reported and paid to the other state or foreign country on income that is not exempt in Montana, the result of the calculation in (1)(a)(ii) (2)(b); or

            (iii)  the proportionate amount of the Montana income tax attributable to income paid to taxed by the other state or foreign country, the result of the calculation in (1)(a)(iii) (2)(c).

            (2)(3)  If the claim for credit does include the taxpayer's pro rata share of income tax paid to another state or country by an S corporation or the distributive share stated separately or non-separately of income taxes paid by a partnership, which is to another state or foreign country, on income which that is subject to Montana income tax:

            (a)  increase the taxpayer's Montana adjusted gross income AGI for the tax year the entity paid deducted the income taxes by the taxpayer's share of the entities entity's deduction for taxes paid to the other state or foreign country for which the entity intends to claim the credit;

            (b)  calculate the Montana income tax liability taking the increase in Montana adjusted gross income AGI into account;

            (c)  determine the taxpayer's share of the amount of net entity income that is included in Montana adjusted gross income AGI (do not include income that is exempt in Montana);

            (d)  determine the taxpayer's share of the amount of income tax reported and paid to the other state or foreign country by the entity on income that is not exempt in Montana by multiplying the share of the amount of tax reported and paid to the other state or foreign country by the entity by a fraction,:

            (i)  the numerator of which is the share of the amount of the entity's net income included in the Montana adjusted gross income AGI (excluding income exempt in Montana),; and

            (ii)  the denominator of which is the share of the total amount of the entity's net income (including income exempt in Montana); and.

            (e)  multiply the recalculated Montana income tax liability by a fraction, the numerator of which is the taxpayer's share of income of the entity included in the taxpayer's Montana adjusted gross income AGI, adjusted as provided in (2)(3)(a), and the denominator of which is the taxpayer's total Montana adjusted gross income AGI, adjusted as provided in (2)(3)(a).;

            (3)(f)  The the credit allowable is the lower of:

            (a)(i)  the share of the amount of income tax reported and paid by the entity to the other state or foreign country;

            (b)(ii)  the share of the amount of the income tax reported and paid to the other state or foreign country by the entity on the share of income that is not exempt in Montana, the result of the calculation in (2)(3)(d); or

            (c)(iii)  the proportionate amount of the Montana income tax attributable to the share of income of the entity paid reported to the other state or foreign country, the result of the calculation in (2)(3)(e).

            (4)  Examples of how to calculate these credits paid to another state or country are outlined in (a) through (c):

     (a)  Example 1 - Taxpayer, a full-year Montana resident, sold real property in Idaho State X in 2002 2008.  Idaho State X does not provide nonresidents a credit for income earned in that state if that income is taxable in another state.  In 2003 2009, the taxpayer was legally required to, and did, file a 2002 2008 Idaho State X income tax return reporting the transaction and paying Idaho State X an income tax of $700.  The taxpayer's $5,000 gain on the sale of the Idaho State X property was included in the taxable income reported on the 2002 2008 Montana income tax return.  The taxpayer's 2002 2008 Montana income tax liability was $3,400.  The taxpayer's total 2002 2008 Montana adjusted gross income AGI was $23,000, which included the $5,000 gain on the sale of property in State X.  The taxpayer calculates the amount of credit the taxpayer may claim against the 2003 2008 Montana income tax liability as follows: is $700, the smaller of the amounts in (i) through (iii):

 

            $3,400 x $5,000 / $23,000= $739

 

Montana income tax liability multiplied by taxpayer's income from the other state or foreign country included in the taxpayer's Montana adjusted gross income divided by taxpayer's total Montana adjusted gross income.  Lower of tax paid ($700) or result of calculation ($739) = $700.  The taxpayer may claim a credit of up to $700 against the 2003 2008 Montana income tax liability.

     (i)  The amount of income tax paid to State X is $700;

     (ii)  The amount of income tax paid to State X on income that is not exempt in Montana is $700.  This amount is determined by multiplying the tax paid to State X ($700) by a fraction, the numerator of which is the amount of income from State X that is included in Montana AGI ($5,000), and the denominator of which is the total amount of income from State X, including any income that is exempt in Montana.  The calculation is $700 x ($5,000/$5,000) = $700;

     (iii)  The proportionate amount of the Montana income tax attributable to income taxed by State X is $739.  This amount is determined by multiplying the Montana income tax liability without the credit ($3,400) by a fraction, the numerator of which is the income from State X included in Montana AGI ($5,000), and the denominator of which is total Montana AGI ($23,000).  The calculation is $3,400 x ($5,000/$23,000) = $739.

     (b)  Example 2 - Taxpayer, a full-year Montana resident, was a shareholder in an S corporation that was engaged in banking in State X in 2002 2009.  State X does not allow S corporations engaged in financial businesses to elect state-level S corporation treatment and imposes a tax on them measured by net income.  The following represents what occurred:

     (i)  The S corporation was required to and did file a 2002 2009 income tax return with State X in 2003 2010 and paid a tax measured by its net income of $132,000, $121,000 by estimated payments made in 2002 2009 and the balance of $11,000 in 2003 2010 when it filed its 2002 2009 return;

     (ii)  The S corporation paid $15,000 tax to State X for tax year 2001 2008 when it filed its 2001 2008 return in 2002 2009.  The S corporation's non-separately stated and separately stated items for tax year 2002 2009 were as follows, of which the Montana resident shareholder's share was 10%:

     (A)  An ordinary income of $2,000,000 from banking business includes a deduction of $136,000 for Minnesota State X taxes paid in 2002 2009, $121,000 for estimated payments in 2002 2009, and $15,000 for 2001 2008 taxes paid in 2002 2009;

 

     Tax exempt interest income                   $1,200,000

      Ordinary dividends                                      300,000

 

     (B)  The taxpayer's total 2002 2009 Montana adjusted gross income (AGI) was $500,000, which included 10% of the S corporation's ordinary dividends, or $30,000, and 10% of the ordinary income from its banking business, or $200,000;

     (C)  The shareholder's $200,000 share of the S corporation's ordinary income from its business was reduced by the shareholder's share of the S corporation's deduction for $136,000 income taxes paid to State X in 2002 2009, or by $13,600 (had the shareholder paid the shareholder's 10% share of the Minnesota State X's taxes rather than the S corporation, the shareholder's 10% pro rata share of the S corporation's ordinary income for 2002 2009 would have been $213,600);

     (D)  The shareholder's 10% share of the S corporation's tax-exempt interest, or $120,000, is exempt from Montana individual income tax and but is not subject to tax by both State X and Montana; and

     (E)  Assume the taxpayer's 2002 2009 Montana tax liability would be $50,000 if the credit were not claimed;

     (iii)  The taxpayer calculates the Montana income tax liability and the amount of credit the taxpayer may claim against the 2002 2009 income tax liability as follows:

     (A)  The taxpayer's Montana taxable income is increased by the pro rata share of the S corporation's deduction for State X taxes paid for which the taxpayer claims the credit;

 

     Montana AGI:             $500,000

     Reverse deduction:                   13,600

     Adjusted MT AGI:                  $513,600

 

     (B)  The taxpayer's Montana income tax liability is recalculated.  Tax on adjusted Montana AGI of $513,600:  $56,500 (assumed result).  The taxpayer's pro rata share of the amount of net S corporation income that is included in Montana adjusted gross income is determined and the pro rata share of the S corporation's income tax paid allocated to income taxed in Montana pro rata share of the tax reported and paid to State X by the S corporation for 2009 ($13,200) is multiplied by the proportion of the taxpayer's pro rata share of the S corporation income taxed in State X that is not exempt in Montana ($230,000) to the taxpayer's pro rata share of the amount of income that is taxable in State X, including income that is exempt in Montana ($350,000):

 

            Ordinary income from banking operations                                          $200,000

            Ordinary dividends                                                                                      30,000

            S corporation income exempt from Montana tax                                  120,000

 

            Pro rata share of S corporation tax Taxpayer's share of income tax reported and paid to State X on income that is not exempt in Montana:

 

            $13,600 $13,200 x $230,000 / $350,000 = $8,937 $8,674

 

     (C)  The taxpayer's Montana income tax liability is recalculated.  Tax on adjusted Montana AGI of $513,600:  $56,500 (assumed result).  The recalculated Montana income tax liability ($56,500) is multiplied by the ratio of S corporation net income included in Montana AGI, increased by the pro rata share of the S corporation deduction for the income taxes paid ($200,000 + $30,000 + $13,600 = $243,600) to the taxpayer's total adjusted gross income Montana AGI, increased by the pro rata share of the S corporation deduction for income taxes paid ($513,600).

 

            Montana income tax attributable to income that is taxed in both states:

     $56,500 x $243,600 / $513,600 = $26,824 $26,798

 

     (D)  The allowable credit is $8,937 $8,674, the lower of:

     (I)  pro rata share of the income tax reported and paid by the S corporation, $13,600 $13,200;

     (II)  pro rata share of the amount of the income tax reported and paid to the other state or foreign country by the S corporation on their pro rata share of income that is not exempt in Montana, $8,937 $8,674; and

     (III)  proportionate amount of the Montana income tax attributable to their pro rata share of income of the S corporation paid reported to the other state or foreign country, $26,824 $26,798.

     (c)  Example 3 – A full-year Montana resident pays $1,000 in income taxes to a foreign country.  For federal income tax purposes, the taxpayer elects to claim the federal foreign credit for those taxes rather than a deduction.  The amount of the foreign federal tax credit is $800, $500 of which the taxpayer claims currently and $300 of which is allowed to be carried back and forward under IRS 904(c).  In calculating the Montana credit for taxes paid to the foreign country, the taxpayer must use $200 rather than $1,000 as the amount of taxes paid to the foreign country.

 

     AUTH: 15-30-305, 15-30-2620, MCA

     IMP: 15-30-124, 15-30-2302, MCA

 

            REASONABLE NECESSITY:  The department is proposing to amend ARM 42.4.403 in order to reduce unnecessary wording and expand on the examples to make the rule about these complicated transactions easier to read.  There has been confusion among taxpayers about the amount of tax paid to the other state that should be included in the calculation, and changes have been made to clarify that the amount reported on that state's return is the amount that is used to calculate the credit, even if it is paid in another year.  An example was added to show the computation of the credit when there is a carryover of the federal tax credit. The years in the examples were updated to make them more relevant to the reader.

            The amendment of the authority and implementing cites is necessary to reflect the recodification of the statutes in Title 15, chapter 30, MCA, enacted by the 2009 Legislature in HB 24 (Ch. 147, L. 2009).

 

            42.4.404  DEDUCTIONS NOT ALLOWED WHEN CREDIT CLAIMED

            (1) and (2) remain the same.

 

            AUTH: 15-30-305, 15-30-2620, MCA

            IMP: 15-30-111, 15-30-2110, MCA

 

            REASONABLE NECESSITY:  The proposed amendment to ARM 42.4.404 is necessary to reflect the recodification of the statutes in Title 15, chapter 30, MCA, enacted by the 2009 Legislature in HB 24 (Ch. 147, L. 2009).

 

42.4.501  DEFINITIONS  (1) through (3) remain the same.

 

AUTH: 15-30-303, 15-30-2618, MCA

IMP: 15-30-103, 15-30-105, 15-30-183, 15-30-2103, 15-30-2104, 15-30-2301, MCA

 

REASONABLE NECESSITY:  The proposed amendment to ARM 42.4.501 is necessary to reflect the recodification of the statutes in Title 15, chapter 30, MCA, enacted by the 2009 Legislature in HB 24 (Ch. 147, L. 2009).

 

42.4.502  CAPITAL GAIN CREDIT  (1)  For the applicable tax years shown below, an individual may claim a credit against their Montana individual income tax of up to 1% of their net capital gain.  For tax years beginning after December 31, 2006, an individual may claim a credit against their Montana individual income tax of up to 2% of their net capital gain.  The credit is based on the net capital gain as shown on the individual's Montana individual income tax return.  Spouses who file a joint return for federal income tax purposes but a separate return for Montana income tax and who elect to claim the same amount of capital loss deduction as shown on their joint federal income tax return as provided in 15-30-2110, MCA, for tax years beginning after December 31, 2006, must compute the capital gain credit consistently.  The credit is nonrefundable and may not be carried back or carried forward to any other tax year.  The credit must be applied before any other credit.

(2) remains the same.

            (3)  For an estate or trust filing a form FID-3, Montana fiduciary return, the credit is calculated on the net capital gains reported minus any net capital gains distributed to any beneficiary.

(3)(4)  Married taxpayers filing separately must compute and report their capital gains and losses as provided in ARM 42.15.206.  For tax years beginning after December 31, 2006, spouses who have filed a joint federal return and are filing a separate Montana return, may not, except as provided in (5), calculate the credit based on their separate gains and losses, but must net gains and losses and calculate the credit on the net capital gain shown on their joint federal return, allocating the resulting credit between them.

(5)  For tax years beginning after December 31, 2008, spouses may elect to report all of their capital gains and losses separately for the current and future tax years.  An election is made by claiming a capital gains credit calculated on a net capital gain amount that is different from the net capital gain shown on the taxpayer's joint federal income tax return, or claiming a capital loss deduction that is greater than the amount that would be allowed for federal income tax purposes if the taxpayer had filed a separate federal income tax return.

(4)(6)  The following are examples of how the credit is applied:

(a)  Example:  For tax year 2005, John and Barbara file a joint 2005 federal income tax return reporting $5,000 of net capital gain.  John's income consists of $50,000 in wages and $8,000 of net capital gain.  Barbara's income consists of $35,000 in wages and $3,000 of net capital loss.  If they file separately rather than jointly for Montana, they must separately compute and report their capital gains and losses as provided in ARM 42.15.206.  John may claim a capital gain credit of up to $80 against his Montana income tax.  Barbara is not entitled to claim any credit against her tax.

 

                                                            Federal Return                      Montana Return

                                                                                                      Column A              Column B

Wages                                                            $85,000                 $50,000                  $35,000

Sch. D capital gain (loss)                             $  5,000                 $  8,000                 ($ 3,000)

Fed. adjusted gross income                        $90,000                 $58,000                  $32,000

Montana adjustment for

  capital loss limit                                                                                                           $ 1,500

Montana adjusted gross income                 $91,500                 $58,000                  $33,500

Capital loss carryover                                                                                                 ($ 1,500)

 

            (b)  Example:  For tax year 2006, John, a single Montana resident with $1,300 of net capital gain, is entitled to an elderly homeowner credit of $500.  His Montana tax, before credits, is $400.  He may claim the $13 capital gain credit before determining the amount of his refundable elderly homeowner tax credit.

 

Montana tax before credits                                                  $ 400

Capital gain credit                                                                ($  13)

Montana tax after capital gain credit                                   $ 387

Elderly homeowner credit                                                    ($ 500)

Refund                                                                                    $ 113

 

(c)  Example:  For tax year 2006, Mary has wages of $80,000 and has $50,000 of net capital gain, $30,000 of which was realized from an investment in a small business investment corporation that is exempt from Montana income tax as provided in 15-33-106, MCA.  Mary is entitled to a capital gain credit of $200, 1% of the $20,000 net capital gain included in her Montana adjusted gross income.

(d)  Example:  For tax year 2006, Patrick, a nonresident, has wages of $50,000, net capital gain of $8,000, and a distributive share of $10,000 of ordinary income from an S corporation.  In this example, The the $10,000 ordinary income from the S corporation is Montana source income.  The wages and capital gain are not Montana source income.  Assume that his Montana tax, computed as if he were a resident, on his taxable income after Montana exemptions, exclusions, and deductions, is $3,000.  The capital gain credit of $80 is applied against the tax determined as if he were a resident.

 

Montana tax determined as if resident                                                       $3,000

Capital gain credit                                                                                        ($   80)

Tax to which nonresident ratio applied                                                       $2,920

Ratio of Montana source income to income

  from all sources ($10,000/$68,000)                                                               147

Montana tax ($2,920 x .147)                                                                        $   429

 

(e)  Example:  For tax year 2007, John and Barbara file a joint 2007 federal income tax return reporting $5,000 of net capital gain.  John's income consists of $50,000 in wages and $8,000 of net capital gain.  Barbara's income consists of $35,000 in wages and $3,000 of net capital loss.  If they file separately rather than jointly for Montana, they must separately compute and report their capital gains and losses as provided in ARM 42.15.206.  John may claim a capital gain credit of up to $160 ($8,000 x 2%) against his Montana income tax.  Barbara is not entitled to claim any credit against her tax.

 

                                                            Federal Return                      Montana Return

                                                                                                      Column A              Column B

Wages                                                            $85,000                 $50,000                  $35,000

Sch. D capital gain (loss)                             $  5,000                 $  8,000                  $(3,000)

Fed. adjusted gross income                        $90,000                 $58,000                  $32,000

                                                                                                                                                     

Montana adjusted gross income                 $90,000                 $58,000                  $32,000

 

             (f)  Example:  For tax year 2009, John and Barbara file a joint 2009 federal income tax return reporting $2,000 of net capital gain.  John's income consists of $50,000 in wages and $8,000 of net capital gain.  Barbara's income consists of $35,000 in wages and $6,000 of net capital loss.  If they file separately rather than jointly for Montana, unless they elect to separately report their capital gains and losses for this and future years as provided in (5), their capital gain credit is 2% of their net capital gain of $2,000, or $40.

            (g)  Example:  Assume the same facts as the example in (f) except that the spouses do elect to separately report their capital gains and losses as provided in subsection (5).  John may claim a capital gain credit of up to $160 ($8,000 x 2%) against his Montana income tax.  Barbara is not entitled to claim any credit against her tax.

 

                                                            Federal Return                      Montana Return

                                                                                                      Column A              Column B

Wages                                                            $85,000                 $50,000                  $35,000

Sch. D capital gain (loss)                             $  2,000                 $  8,000                  $(6,000)

Fed. adjusted gross income                        $87,000                 $58,000                  $32,000

Montana adjustment for

  capital loss limit                                                                                                           $ 4,500

                                                                                                                                                     

Montana adjusted gross income                 $94,500                 $58,000                  $36,500

Montana capital loss carryover                                                                                  ($ 4,500)

 

AUTH: 15-30-303, 15-30-2618, MCA

IMP: 15-30-103, 15-30-105, 15-30-183, 15-30-2104, 15-30-2106, 15-30-2301, MCA

 

            REASONABLE NECESSITY:  The department is proposing to amend ARM 42.4.502 because taxpayers were claiming the capital gains credit twice, once on the fiduciary return and again on the beneficiary's return.  The rule clarifies that trusts and estates can only claim the capital gains credit on capital gains taxable to the estate or trust and not capital gains distributed to beneficiaries.

In addition, the department has had several questions about how the credit is claimed when spouses file jointly on their federal return and separately on their Montana return.  The rule ensures that taxpayers report and classify the credit the same way they reported the gains and losses related to the credits for Montana income tax purposes.  The rule provides for consistency in reporting and therefore ensures fundamental fairness for all taxpayers.

Minor changes in wording have been done to make the rules easier to read.

The statutory amendment to the authority and implementing cites is necessary because the 2009 Legislature recodified those statutes with HB 24 (Ch. 147, L. 2009).

 

42.4.601  DEFINITIONS  (1) through (5)(b) remain the same.

 

AUTH: 15-30-305, 15-30-2620, MCA

IMP: 15-30-188, 15-30-189, 15-30-2154, 15-30-2370, MCA

 

            REASONABLE NECESSITY:  The proposed amendment to ARM 42.4.601 is necessary to reflect the recodification of the statutes in Title 15, chapter 30, MCA, enacted by the 2009 Legislature in HB 24 (Ch. 147, L. 2009).

 

42.4.602  RURAL PHYSICIAN'S CREDIT – QUALIFICATIONS -- LIMITATIONS  (1)  The credit has been repealed effective December 31, 2010, and only physicians who began qualifying rural practice before April 1, 2007, can qualify for the credit.  If the requirements described in (2) are met, a licensed physician who commences practice in a rural area is eligible for a credit against the physician's individual income tax liability of up to $5,000 a year for four successive years (up to $20,000 total) beginning in the year the practice commences.  Each annual credit is subject to recapture and must be repaid as provided in ARM 42.4.603 if the physician ceases practice in the rural area within four years after the tax year the credit is allowed.

(2) and (3) remain the same.

           

AUTH: 15-30-191, 15-30-2372, MCA

IMP: 15-30-190, 15-30-2370, 15-30-2371, MCA

 

            REASONABLE NECESSITY:  The 2007 Legislature in SB 553, (Ch. 361 L. 2007), prospectively repealed the credit effective December 31, 2010, and limited it to physicians whose qualifying practice begins before January 1, 2008.  Because the physician is required to maintain the practice for at least nine months of the tax year for which the credit is claimed, the physician would be required to maintain a qualifying practice prior to April 1, 2007.  The department is amending ARM 42.4.602 to give taxpayers notice of this repeal.

            The statutory amendments to the authority and implementing cites are necessary to reflect the recodification of the statutes in Title 15, chapter 30, MCA, enacted by the 2009 Legislature in HB 24 (Ch. 147, L. 2009).

 

            42.4.603  RURAL PHYSICIAN'S CREDIT - REPAYMENT  (1) through (4) remain the same.

 

            AUTH: 15-30-191, 15-30-2372, MCA

            IMP: 15-30-190, 15-30-2371, MCA

 

            REASONABLE NECESSITY:  The proposed amendment to ARM 42.4.603 is necessary to reflect the recodification of the statutes in Title 15, chapter 30, MCA, enacted by the 2009 Legislature in HB 24 (Ch. 147, L. 2009).

 

42.4.702  QUALIFYING FOR THE 2007 PROPERTY TAX CREDIT UNDER 15-30-2336, MCA  (1)  The 2007 Legislature enacted a refundable credit against individual income tax that is calculated on the tax paid on $20,000 of market value of a taxpayer's principal residence multiplied by a "relief multiple" that is zero unless changed by the Legislature.  The 2007 legislation provided a method for determining the credit for 2007.  The 2009 Legislature amended the statute to remove the reference to the 2007 calculation but did not enact legislation changing the relief multiple, which remains at zero so that no credit is available for any tax year except 2007 at this time.

(2)  If a taxpayer or When taxpayers changed change principal Montana residences during 2007 the tax year for which the credit is claimed, the department may consider the ownership and occupancy of the successive residence as a principal residence when determining whether the taxpayer or taxpayers they qualify for the seven month minimum term of residence for the property tax credit as provided in 15-30-140, 15-30-2336, MCA.

(2)(3)  For the successive residence to be considered as a principal residence for purposes of a minimum term of residence for the property tax credit as stated in 15-30-140, 15-30-2336, MCA, the taxpayer or taxpayers must, during the tax year:

(a)  move out of the primary principal residence in Montana and into the successive principal residence in Montana; and

(b)  have paid Montana property taxes on either or both residences for at least seven months.

(3)(4)  The taxpayer or taxpayers may only make a claim for a credit under 15-30-140 15-30-2336, MCA, for one of the residences.

(4)(5)  Ad-valorem taxes and fees paid for trailers and other recreational vehicles do not qualify for this credit.

 

AUTH: 15-1-201, 15-30-105, 15-30-140, 15-30-2104, 15-30-2336, MCA

IMP: 15-1-201, 15-30-140, 15-30-2336, MCA

 

            REASONABLE NECESSITY:  The proposed amendments to ARM 42.4.702 are necessary to clarify that the credit is not limited to 2007 and to explain the effect of the 2009 legislative amendments that left the relief multiple at zero.  The practical effect is that there is no credit available to taxpayers through this provision of law at this time.

The authority and implementing statutes are amended to reflect the recodification of the statutes in Title 15, chapter 30, MCA, enacted by the 2009 Legislature in HB 24 (Ch. 147, L. 2009).

 

            42.4.703  CALCULATION OF THE 2007 REFUNDABLE INDIVIDUAL INCOME TAX CREDIT UNDER 15-30-2336, MCA  (1)  Section 15-30-140, MCA, provides that the The amount of the 2007 refundable income tax credit is to be determined by applying a factor known as "the relief multiple" to the amount of property taxes that would otherwise be owed by class four residential property owners on $20,000 of market value of their qualifying principal residence, for the elementary school mills levied under 20-9-331, the high school mills levied under 20-9-333, and the state school equalization mills levied under 20-9-360, MCA, for tax year 2007.  This calculation requires determination of, first, the value of the relief multiple; and, second, the amount of property taxes that would be owing on $20,000 of market value of class four residential property for the school mills levied under 20-9-331, 20-9-333, and 20-9-360, MCA, for tax year 2007.  The product of these two amounts determines the individual income tax credit amount for tax year 2007.

            (2)  The base value of 0 is established in 15-30-140, MCA, as the relief multiple, and further provides that, for tax year 2007 only, this value shall be increased by 0.1 for each $1,000,000 of unaudited general fund revenue received in fiscal year 2007 in excess of a threshold amount of $1,802,000,000.  As required by 15-30-140, MCA, the Department of Administration certified the unaudited general fund revenue to be $1,838,053,331 in a July 27, 2007, memorandum addressed to the Budget Director from the Director of the Department of Administration.  Based on this certified amount, and the formula provided for in statute, the Unless amended by the Legislature, the relief multiple is zero.  The relief multiple for tax year 2007 is determined to be was 3.6., calculated as follows:

 

Certified fiscal 2007 unaudited general fund revenue:     $1,838,053,331

Revenue threshold contained in HB9:                                $1,802,000,000

Revenue in excess of threshold:                                          $     36,053,331

 

Excess revenue rounded down to nearest million:            $     36,000,000

 

Rounded excess revenue expressed in millions:                       36

            Relief multiple for each $1,000,000 of excess revenue:                    0.1

            Relief multiple for tax year 2007:                                                               3.6

 

            (3)  The amount of tax year 2007 property taxes owing on $20,000 of market value for a class four residential property owner depends on the applicable tax year 2007 must also take into account any exemptions that apply, including the homestead exemption percentage provided in 15-6-222, MCA, and the taxable valuation rate provided in 15-6-134, MCA; and the number of mills levied under 20-9-331, 20-9-333, and 20-9-360, MCA, for tax year 2007.

            (4)  As provided in 15-6-222, MCA, For 2007 the homestead exemption for tax year 2007 is was 33.2%.  Alternatively, this means, meaning that only 66.8% of the market value of class four property is was subject to property tax for tax year 2007.  Also as provided in 15-6-134, MCA, the taxable valuation rate for tax year 2007 is was 3.07%, and.  Finally, a total of 95 basic school mills are were levied under 20-9-331, 20-9-333, and 20-9-360, MCA, for tax year 2007.  These statutory parameters resulted in a net property tax of $38.96 being levied on $20,000 of class four residential property for tax year 2007, calculated as follows:

 

Market value:                                                            $20,000

Taxable market value factor:                                       66.8%

Taxable market value:                                             $13,360

Taxable valuation percentage:                                   3.07%

Taxable valuation:                                                    $410.15

Multiply by 95 mills:                                                      0.095

Tax credit per unit of relief multiple:                       $  38.96

 

As shown above, the total value of the individual income tax credit provided to Montana homeowners for tax year 2007 is the product of:

            (a)  the amount of tax year 2007 tax liability on $20,000 of class four residential property associated with the 95 mills levied under 20-9-331, 20-9-333, and 20-9-360, MCA; and

            (b)  the relief multiple as calculated above.

            (5)  The tax credit for tax year 2007 is was $140 when rounded to the nearest whole dollar (38.96 x 3.6= 140):.

 

Property tax on $20,000 of market value (95 mills):                      $38.96

            Tax year 2007 relief multiple:                                                                 3.6

            Tax year 2007 individual income tax credit amount

(rounded to nearest whole dollar):                                                   $   140

 

            AUTH: 15-30-140, 15-30-2336, MCA

            IMP: 15-6-134, 15-6-222, 15-30-140 15-30-2336, MCA

 

REASONABLE NECESSITY:  The proposed amendment to ARM 42.4.703 is necessary to remove unnecessary specific detail related to computation of the credit for 2007 and to clarify that the credit is currently zero.  In practical terms, the credit is not available to taxpayers through this provision of law at this time.

The amendments to the authority and implementing statutes are amended to reflect the recodification of the statutes in Title 15, chapter 30, MCA, enacted by the 2009 Legislature in HB 24 (Ch. 147, L. 2009).

 

4.  Concerned persons may submit their data, views, or arguments, either orally or in writing, at the hearing.  Written data, views, or arguments may also be submitted to: Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-3696; or e-mail canderson@mt.gov and must be received no later than April 30, 2010.

 

5.  Cleo Anderson, Department of Revenue, Director's Office, has been designated to preside over and conduct the hearing.

 

6.  An electronic copy of this Notice of Public Hearing is available through the department's site on the World Wide Web at www.mt.gov/revenue, under "for your reference"; "DOR administrative rules"; and "upcoming events and proposed rule changes."  The department strives to make the electronic copy of this notice of Public Hearing conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered.  In addition, although the department strives to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.

 

7.  The Department of Revenue maintains a list of interested persons who wish to receive notices of rulemaking actions proposed by this agency.  Persons who wish to have their name added to the list shall make a written request, which includes the name and e-mail or mailing address of the person to receive notices and specifies that the person wishes to receive notices regarding particular subject matter or matters.  Notices will be sent by e-mail unless a mailing preference is noted in the request.  Such written request may be mailed or delivered to the person in 4 above or faxed to the office at (406) 444-3696, or may be made by completing a request form at any rules hearing held by the Department of Revenue.

 

8.  The bill sponsor contact requirements of 2-4-302, MCA, apply and have been fulfilled.  The primary bill sponsor for HB 439 of the 2005 Legislature, Representative Wiseman, was notified on March 6, 2010, by electronic mail; the primary bill sponsor for HB 9 of the May Special Session of the 2007 Legislature, Representative Sonju, was notified on March 6, 2010, by electronic mail; and the primary bill sponsor for HB 24 of the 2009 Legislature, Representative Morgan, was contacted on July 14, 2009, by regular mail; the primary sponsor for SB 553 of the 2007 Legislature, Senator Black, was notified on March 6, 2010, by electronic mail; the primary sponsor for SB 7 of the 2009 Legislature, Senator Gebhardt, was notified on March 6, 2010, by electronic mail.

 

 

 

/s/  Cleo Anderson                            /s/  Dan R. Bucks

CLEO ANDERSON                          DAN R. BUCKS

Rule Reviewer                                   Director of Revenue

 

Certified to Secretary of State March 15, 2010