Does Oregon Tax Military Retirement?

Military retirement pay consists of payments from the U.S. Armed Forces, which includes the National Guard and reserve components. For those residing in Oregon, specific state tax provisions apply directly to this form of income. The state’s approach determines how much of this federally recognized income is ultimately subject to Oregon’s income tax.

Oregon’s Taxation of Military Retirement Income

The starting point for calculating Oregon’s state income tax is the federal Adjusted Gross Income (AGI). For most retirees, military retirement pay is included in their federal AGI and is therefore considered taxable income by the federal government. Because Oregon uses the federal AGI as its baseline, this retirement income is, by default, also subject to Oregon’s state income tax. This means that without any specific state-level adjustments, the full amount of military retirement pay would be taxed at Oregon’s ordinary income tax rates.

Any tax relief for military retirees comes in the form of specific subtractions that are applied after the initial AGI is determined. These provisions are designed to reduce the amount of income that is ultimately taxed by the state.

The Oregon Federal Pension Subtraction

Oregon offers a tax benefit through a subtraction for federal pension income. The eligibility for this subtraction is tied directly to a specific date: October 1, 1991. If a military retiree’s service was entirely completed before this date, they can subtract 100% of their military retirement pay from their Oregon income.

For retirees whose service period includes time both before and after October 1, 1991, a partial subtraction is available. The calculation for this partial benefit is pro-rated based on the length of service. To determine the excludable percentage, the retiree must divide the number of months served before October 1, 1991, by the total number of months served. For example, if a veteran served a total of 240 months (20 years) and 120 of those months were before the 1991 date, they could subtract 50% of their military pension from their Oregon taxable income.

This benefit is a subtraction from income, not a tax credit. A subtraction reduces the total amount of income that is subject to tax, whereas a credit reduces the final tax liability dollar-for-dollar. This distinction is important, as the value of the subtraction depends on the taxpayer’s marginal tax rate. The subtraction applies only to the military retirement pension and does not extend to other income sources, nor does it apply to VA disability benefits, which are already exempt from federal and state tax.

Proposed Legislative Changes

As of 2025, the Oregon Legislature is considering changes to how military retirement pay is taxed. One proposal seeks to make all military retirement pay exempt from state income tax. Another bill proposes creating a new exemption of up to $17,500 for military retirement income for retirees aged 63 and older, which would apply to tax years beginning on or after January 1, 2025. Retirees should monitor the status of this legislation, as its passage would alter the tax rules described above.

How to Claim the Subtraction on Your Tax Return

To claim the federal pension subtraction, a military retiree must complete specific steps when filing their Oregon income tax return. The primary document needed is Form 1099-R, which reports the total amount of retirement income received for the year.

The calculated subtraction amount is reported on Oregon’s Schedule OR-ASC, Adjustments to Income. On this schedule, the taxpayer will enter the amount of the subtraction and use the designated code for federal pension income. The total subtractions from Schedule OR-ASC are then carried over to the main Oregon tax form, such as Form OR-40 for full-year residents. This entry directly reduces the taxpayer’s Oregon taxable income, lowering their overall state tax liability.