(1) For tax years beginning January 1, 2016, the pension and annuity exclusion is limited to the lesser of the pension and annuity income received or $4,070 for a single person or married couple where only one person receives pension or annuity income.

(a) The exclusion is reduced $2 for every $1 over federal adjusted gross income of $33,910.

(b) By November 1 of each year, the department will multiply the exclusion amount and the federal adjusted gross income amount in (a) by the inflation figure for the taxable year as prescribed in 15-30-2110(14), MCA.

(2) When married taxpayers file a joint return and each receives pension and annuity income, their individual exclusion is limited to the lesser of each person's retirement income or the amount allowed in (1). The total of both individuals' exclusion is phased out at the rate described in (1).

(3) When married taxpayers file separately, each spouse's exclusion and phase-out are computed independently and a spouse's exclusion begins to be phased out only when his or her federal adjusted gross income exceeds the amount allowed in (1)(a). Examples for tax years beginning on or after January 1, 2016, are:

(a) Jane, a single taxpayer, has federal adjusted gross income of $30,000 which is made up of $5,000 of pension income and $25,000 of other income. Her pension and annuity exclusion for Montana purposes is $4,070.

(b) Frank and Edith, a married couple, file a joint income tax return and both receive pension and annuity income. Frank's taxable pension included in federal adjusted gross income is $10,000. Edith's taxable pension included in federal adjusted gross income is $2,000. Their combined federal adjusted gross income is $30,000. Their Montana pension and annuity exclusion is $6,070 (the maximum $4,070 for Frank and the full taxable amount of pension Edith received is $2,000). Even though their combined federal adjusted gross income is below $33,910, Edith is not entitled to a $4,070 pension exclusion as the exclusion is limited to her taxable pension of $2,000.

(c) John, a single taxpayer, has federal adjusted gross income of $35,000. This consists of $17,000 of taxable pension income and $18,000 of other income. John's Montana pension exclusion is $1,890. ($4,070 - (($35,000 - $33,910) x 2)).

(d) John and Barbara, a married couple, file a joint income tax return and both report federal taxable pension income. John's federal taxable pension is $5,600 and Barbara's federal taxable pension income is $3,000. Their combined federal adjusted gross income is $37,500. Their combined Montana pension and annuity exclusion is $960. ($8,140 - (($37,500 - $33,910) x 2)).