Dr. Lstiburek's rule of thumb is a minimum R20 in basement walls north of the Mason-Dixon Line. (Of course, he doesn't always follow his own rules.) I've used R13 dense fg batts and 1" of XPS in basements plus spf in the rim joist area. That yields a nominal R18. However, in your colder climate (very cold on climate maps) I would be concerned that the 1" board (R5) would not be enough to keep the wall free from condensation on the above grade portion. What's more important than the nominal R value is the tightness of the wall to air penetration. That's why the tape, t&g, caulking and polyurethane spray is so important. BTW, since I live in my own homes, I can say the basement comfort in homes with the XPS/fg combo is noticeably greater than the previous standard fg. Plus there's less need for supplementary heating.

It's definitely a regional thing. We've lived in 6 different states, some of them only above ground finished space was counted, some of them any finished space was counted and some of them the basement if finished could be counted if it was a "daylight" or "walk out" basement. Check with your local realtor for what is common in your area.

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If you want to finish the basement you have to apply for the permit and meet all basic building, electrical, plumbing (if you have a bathroom) and fire code requirements for a habitable basement. If you just want paint the foundation walls, throw down some carpeting, etc you don't need anything. As the heating goes, you can tap into existing ducts (if you have a forced hot air system) that will give you some heat down there just make sure your furnace can handle additional heating space...or you can add electric baseboard heat and if you want to add some outlets or lights you will also need a permit to make sure it's done right... Just keep in mind using electric baseboard, you have to calculate the area and make sure you install the right size baseboard to handle the area or if baseboards undersized they will run constantly and you end up with a huge bill. That said, basements are usually comfortable in the winter and cool in the summer so most people who don't mind just having foundation walls painted don't usually add any heating down there. But you should have some sort of an air exchange, if you go by code you have to have a window opening area to be equal to 4% of the floor area that is the requirement or you have to provide mechanical ventilation system capable of providing 0.35 air exchanges per hour. Good luck