How Oregon income tax works: four brackets, the federal tax subtraction, and a return that rebuilds your deductions

Oregon has no sales tax, and the income tax is where it makes up the difference. Form OR-40 starts from federal adjusted gross income, line 7, and then does its own arithmetic: a short list of additions, a longer list of subtractions, a subtraction for the federal income tax you owe, and a choice between a small standard deduction and Oregon’s own itemized deductions. What is left is taxed at 4.75%, 6.75%, 8.75% and 9.9%. The brackets are narrow at the bottom. For 2026 the 8.75% rate begins at about $11,400 of taxable income on a single return and $22,800 on a joint one, so most working Oregonians pay 8.75% on their last dollar. The 9.9% rate starts at $125,000 single or $250,000 joint, and those two numbers have not moved in years because the statute does not index them.

Three features set the Oregon return apart. The federal tax subtraction lets you deduct up to $8,500 of your federal income tax, so Oregon tax goes down when federal tax goes up. The exemption is a credit, $256 per person for 2025 (verify), not a deduction, and it disappears above $100,000 of AGI single or $200,000 joint. And you may itemize on Schedule OR-A even when you took the federal standard deduction, which most homeowners should, because the Oregon standard deduction is only $2,835 single or $5,670 joint for 2025 ($2,910 and $5,820 reported for 2026 (verify)).

Who files, and on what form

A full-year resident files Form OR-40 and reports all income, wherever earned, with a credit for tax paid to another state on income taxed by both. You are a resident if Oregon is your permanent home, or if you keep a home here and spend more than 200 days of the year in the state. A part-year resident files Form OR-40-P, a nonresident with Oregon-source income files Form OR-40-N, and both work out tax on everything and then multiply by an Oregon percentage; see Moving to Oregon. Married couples generally use the filing status they used federally.

Where it starts: federal AGI

Line 7 of the OR-40 is federal adjusted gross income, copied from Form 1040. By statute Oregon ties to federal taxable income, but the form rebuilds everything below AGI its own way, because Oregon has disconnected from several of the federal deductions that sit there. The qualified business income deduction never reaches Oregon. Neither does anything under section 151 of the federal code, which includes the $6,000 senior deduction enacted for 2025 through 2028; the Department of Revenue’s own guide lists it as a conformity exception. The federal standard deduction is replaced by Oregon’s, and federal itemized deductions are redone on Schedule OR-A.

Anything above the AGI line flows through: an IRA contribution, an HSA deposit, student loan interest, half of self-employment tax. The new federal deductions for tips and overtime are the exception to the rule that below-the-line items do not reach Oregon. The Department allows a subtraction equal to the federal deduction for each, on Schedule OR-ASC, codes 390 and 391. The amount is the federal deduction, not the gross overtime on the paystub: the federal rule deducts only the premium half of time-and-a-half, so the Oregon figure is smaller, and that is correct. The car-loan interest deduction worked the same way on 2025 returns but is added back from 2026 under SB 1507; see What is new in Oregon for 2026.

The additions

Schedule OR-ASC Section A lists the additions. Most households have none. The ones that come up: interest on other states’ municipal bonds, 529 earnings withdrawn for K-12 tuition (Oregon did not adopt that federal expansion), and, beginning with 2026 returns, three items from SB 1507: car-loan interest deducted federally, gain excluded on qualified small business stock, and bonus depreciation on property placed in service in 2026 or later, which Oregon disallows and gives back over the asset’s life.

The subtractions

Lines 10 through 13 and Schedule OR-ASC Section B are where Oregon gives money back. Two lines matter to nearly everyone.

The 529 contribution subtraction ended after 2019; contributions now earn a credit instead (below). Oregon’s own 529 is the one plan that qualifies for it.

The federal tax subtraction, line 10. Enter your 2026 federal income tax liability, roughly the tax on Form 1040 after nonrefundable credits and before withholding, up to the limit: $8,500 for 2025, $4,250 on a separate return, shrinking to zero as AGI rises past $125,000 single or $250,000 joint (verify). The 2026 limit will be in the 2026 Publication OR-17. A family whose federal tax falls to zero because of the child tax credit gets nothing here.

Social Security, line 11. Whatever amount of Social Security was taxed federally, line 6b of the 1040, comes off in full. Pensions and IRA withdrawals do not; see Oregon for retirees.

Standard deduction or Oregon itemized deductions

Line 17 is the Oregon standard deduction: $2,835 single or married filing separately, $5,670 joint or qualifying surviving spouse, $4,560 head of household for 2025 (verify), plus $1,200 (single or head of household) or $1,000 per spouse (joint) for each person 65 or older, and again for blindness; 2026 figures to come. Line 16 is Oregon itemized deductions from Schedule OR-A. You take the larger, and the choice is independent of what you did federally.

That independence matters because the Oregon standard deduction is so small. Schedule OR-A follows the federal Schedule A categories: medical and dental above 7.5% of AGI, taxes paid, mortgage interest, charitable gifts, gambling losses up to winnings, casualty losses. Two Oregon differences: Oregon income tax is never deductible on the Oregon return, and the state-and-local-tax line on the 2025 schedule is capped at $40,000 ($20,000 separate), matching the federal cap. People who stopped keeping charitable receipts in 2018 should start again if they live here. The federal side of itemizing is in Itemized deductions.

The rates

Line 15 minus line 18 is Oregon taxable income, line 19. The tax on line 20 comes from the tax tables below $50,000 and the rate charts above it. The brackets for 2026, with the two lower thresholds indexed and the top one fixed:

The 2026 lower thresholds are the Tax Foundation’s report of the indexed figures; the Department’s 2026 rate chart was not yet posted when this was written. For 2025 they were $4,400 / $11,100 single and $8,800 / $22,200 joint. The $125,000 and $250,000 lines are statutory and do not index.

Everything is taxed at the same rates: wages, interest, dividends, capital gains, rent, IRA withdrawals, unemployment. There is no lower rate for long-term gains. The one rate break is for business income: owners of a business with at least one non-owner employee may elect reduced rates on Schedule OR-PTE-FY, 7% on the first $500,000 (verify), Oregon’s substitute for the QBI deduction it does not allow.

The credits

Standard credits (lines 25 through 28) reduce tax and are lost if unused; carryforward credits (line 30) carry to later years; refundable credits (lines 37 through 39) are paid out even when there is no tax.

The exemption credit is the one nearly everyone claims, and the one with a cliff: a family of four with $199,000 of AGI gets $1,024; at $201,000 it gets nothing. The Oregon EIC jumped from 9% to 14% for 2026 under SB 1507. The family credits are in Credits and breaks for Oregon families; the retirement income credit, which few retirees qualify for, in Oregon for retirees.

The kicker

Line 32 is the Oregon surplus credit, the kicker. When state revenue comes in more than 2% above the forecast for a two-year budget, the surplus is returned as a credit on the next odd-year return. The 2025 return, filed in 2026, carried a kicker of 9.863% of 2024 tax liability. The 2026 return carries none; the Department says plainly that the kicker is not available on the return for an even-numbered year. The state’s August 2026 forecast also shows no kicker for the 2027 return, with revenue about $526 million below the trigger.

Withholding and estimated payments

Oregon withholding is set on Form OR-W-4; the Department has not accepted the federal W-4 for state purposes since 2020. A one-job household usually comes out close. Two earners, or wages plus pension or investment income, usually come out short, because the 8.75% bracket arrives so early. If you expect to owe $1,000 or more after withholding and credits, you must make estimated payments, due April 15, June 15, September 15, 2026 and January 15, 2027; the safe harbor is 90% of this year’s tax or 100% of last year’s (verify), and underpayment interest is figured on Form OR-10. See The W-4 and withholding and Estimated payments.

Local income taxes: the Portland area

Outside the Portland area there are no city or county income taxes. Inside it there are two, both figured on Oregon taxable income, both filed on separate returns with the Portland Revenue Division, both due April 15.

A Portland resident with $300,000 of taxable income on a single return pays 9.9% + 1% + 3% on the last dollar: 13.9%. Employers withhold SHS and PFA only for employees paid over $200,000; everyone else opts in on the OPT form or pays estimates, required from 2026 at $5,000 of liability.

How to file

The Department’s free Direct File Oregon handles full-year resident Form OR-40 returns, original and amended, but not part-year or nonresident returns; since IRS Direct File closed, you type in the federal figures yourself. The return is due April 15, 2027. Oregon honors a federal extension automatically, but the extension is to file, not to pay. Dates, forms and links are in Oregon calendar and forms.

What trips people up

• Taking the Oregon standard deduction because the federal one was taken. Run Schedule OR-A every year you own a home or give to charity.
• Expecting the $6,000 federal senior deduction or the QBI deduction to reduce Oregon tax. Neither reaches Oregon.
• Claiming the exemption credit with AGI just over $100,000 or $200,000.
• A Portland household past $125,000 of taxable income with no MC-40 or MET-40 filed and nothing withheld.
• Looking for a kicker on the 2026 return. There is none.