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Rule Title: COMPUTATION OF CREDIT FOR TAX PAID TO ANOTHER STATE OR COUNTRY
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Department: REVENUE
Chapter: TAX CREDITS
Subchapter: Individual - Credit Allowed Resident Taxpayers for Income Taxes Imposed by Foreign States and Countries
 
Latest version of the adopted rule presented in Administrative Rules of Montana (ARM):

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42.4.403    COMPUTATION OF CREDIT FOR TAX PAID TO ANOTHER STATE OR COUNTRY

(1) In determining the tax credit allowed, the 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.

(2) 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:

(a) determine the amount of income 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;

(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 taxable by the other state or foreign country that is included in Montana AGI (excluding income exempt in Montana;) and

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

(c) 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 taxable by the other state or foreign country that is included in the taxpayer's Montana AGI; and

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

(d) the credit allowable is the lower of:

(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 (2)(b); or

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

(3) If the claim for credit does include the taxpayer's share of income tax paid to another state or country by an S corporation or partnership on income that is subject to Montana income tax:

(a) increase the taxpayer's Montana AGI for the tax year the entity deducted the income taxes by the taxpayer's share of the entity's deduction;

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

(c) determine the taxpayer's share of the amount of net entity income that is included in Montana 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 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).

(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 AGI, adjusted as provided in (3)(a), and the denominator of which is the taxpayer's total Montana AGI, adjusted as provided in (3)(a);

(f) the credit allowable is the lower of:

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

(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 (3)(d); or

(iii) the proportionate amount of the Montana income tax attributable to the share of income of the entity reported to the other state or foreign country, the result of the calculation in (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 State X in 2017. State X does not provide nonresidents a credit for income earned in that state if that income is taxable in another state. In 2018, the taxpayer was legally required to, and did, file a 2017 State X income tax return reporting the transaction and paying State X an income tax of $700. The taxpayer's $5,000 gain on the sale of the State X property was included in the taxable income reported on the 2017 Montana income tax return. The taxpayer's 2017 Montana income tax liability was $3,400. The taxpayer's total 2017 Montana AGI was $23,000, which included the $5,000 gain on the sale of property in State X. The amount of credit the taxpayer may claim against the 2017 Montana income tax liability is $700, the smaller of the amounts in (i) through (iii):

(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 2017. 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 2017 income tax return with State X in 2018 and paid a tax measured by its net income of $132,000, $121,000 by estimated payments made in 2017 and the balance of $11,000 in 2018 when it filed its 2017 return;

(ii) The S corporation paid $15,000 tax to State X for tax year 2016 when it filed its 2016 return in 2017. The S corporation's non-separately stated and separately stated items for tax year 2017 were as follows, of which the Montana resident shareholder's share was 10 percent:

(A) An ordinary income of $2,000,000 from banking business includes a deduction of $136,000 for State X taxes paid in 2017, $121,000 for estimated payments in 2017, and $15,000 for 2016 taxes paid in 2017;

Tax exempt interest income $1,200,000

Ordinary dividends 300,000

(B) The taxpayer's total 2017 Montana AGI was $500,000, which included 10 percent of the S corporation's ordinary dividends, or $30,000, and 10 percent 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 2017, or by $13,600 (had the shareholder paid the shareholder's 10 percent share of the State X's taxes rather than the S corporation, the shareholder's 10 percent pro rata share of the S corporation's ordinary income for 2017 would have been $213,600);

(D) The shareholder's 10 percent share of the S corporation's tax-exempt interest, or $120,000, is exempt from Montana individual income tax but is subject to tax by State X; and

(E) Assume the taxpayer's 2017 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 2017 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 pro rata share of the tax reported and paid to State X by the S corporation for 2017 ($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

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

$13,200 x $230,000 / $350,000 = $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 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 = $26,798

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

(I) pro rata share of the income tax reported and paid by the S corporation, $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, $8,674; and

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

History: 15-30-2620, MCA; IMP, 15-30-124, MCA; Eff. 12/31/72; AMD and TRANS, from ARM 42.15.502, 2004 MAR p. 1965, Eff. 8/20/04; AMD, 2010 MAR p. 1211, Eff. 5/14/10; AMD, 2017 MAR p. 2095, Eff. 11/10/17.


 

 
MAR Notices Effective From Effective To History Notes
42-2-981 11/10/2017 Current History: 15-30-2620, MCA; IMP, 15-30-124, MCA; Eff. 12/31/72; AMD and TRANS, from ARM 42.15.502, 2004 MAR p. 1965, Eff. 8/20/04; AMD, 2010 MAR p. 1211, Eff. 5/14/10; AMD, 2017 MAR p. 2095, Eff. 11/10/17.
42-2-823 5/14/2010 11/10/2017 History: 15-30-2620, MCA; IMP, 15-30-124, MCA; Eff. 12/31/72; AMD and TRANS, from ARM 42.15.502, 2004 MAR p. 1965, Eff. 8/20/04; AMD, 2010 MAR p. 1211, Eff. 5/14/10.
8/20/2004 5/14/2010 History: Sec. 15-30-305, MCA; IMP, Sec. 15-30-124, MCA; Eff. 12/31/72; AMD and TRANS, from ARM 42.15.502, 2004 MAR p. 1965, Eff. 8/20/04.
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