Does Oregon Tax Pension Income?

Oregon generally taxes most pension income received by its residents, though specific rules and potential exemptions exist that can affect individual tax liabilities. Understanding these regulations is important for retirees or those planning for retirement in the state.

Oregon’s General Taxation of Pension Income

Oregon treats most pension and annuity income as taxable, aligning with how such income is handled for federal income tax purposes. This includes distributions from various retirement vehicles, such as private employer-sponsored plans, Individual Retirement Accounts (IRAs), and 401(k) plans. The state’s income tax rates range from 4.75% to 9.9%, depending on the income level. Oregon does not provide a general exemption for all pension income solely based on its source, meaning both public and private pension distributions are subject to taxation.

Specific Considerations for Different Pension Sources

The tax treatment of pension income in Oregon can vary based on its origin, with certain types having distinct rules. Federal civil service pensions, including military retirement pay, are taxable by Oregon. However, a subtraction from income is allowed for the portion of federal pension income attributable to service performed before October 1, 1991. This rule also applies to military retirement pay, where a percentage of the taxable federal pension income can be subtracted based on the proportion of pre-October 1991 service.

Pensions from the Oregon Public Employees Retirement System (PERS) and other Oregon state or local government plans are also subject to state income tax. Historically, PERS benefits were exempt, but this changed following a 1989 U.S. Supreme Court ruling that required states to tax federal and state pensions equally. To address this, certain Tier One PERS members hired before July 14, 1995, with service before October 1, 1991, may receive a “tax remedy.” This remedy is an increase in their monthly benefits, designed to compensate for the state income tax imposed on their PERS benefits.

For Oregon residents, pensions earned for work performed outside of Oregon are taxable by the state. Social Security benefits are exempt from Oregon state income tax, regardless of the recipient’s income level.

Oregon Tax Relief for Retirees

Oregon offers specific tax relief measures that can help reduce the tax burden on retirees, particularly through a dedicated tax credit. The Oregon Retirement Income Credit is available to eligible individuals who are 62 years of age or older by the end of the tax year and are receiving taxable retirement income.

Eligibility for this credit depends on household income thresholds. For single filers, household income needs to be less than $22,500, while for those married filing jointly, it needs to be less than $45,000. Additionally, there are limits on Social Security benefits received: less than $7,500 for single filers and $15,000 for married filing jointly.

The credit can be up to 9% of the taxable retirement income. Retirement income for this credit includes:
Distributions from U.S. government pensions
State public pensions
Employee pension benefit plans
IRAs
KEOGH plans
Deferred compensation plans
Employee annuity plans that are included in federal taxable income

Beyond this credit, retirees aged 66 or older may qualify for a special Oregon medical subtraction for qualifying medical and dental expenses, up to $1,800, depending on their adjusted gross income. An additional standard deduction is also available for those aged 65 or older or who are blind.

Reporting Pension Income on Your Oregon Tax Return

Reporting pension income on an Oregon tax return involves translating federal retirement income information to the state’s specific forms. Pension and annuity distributions are reported to taxpayers on federal Form 1099-R, issued by the pension administrator by January 31 each year.

The information from this federal form is then used to complete the Oregon income tax return, primarily Oregon Form OR-40. Taxable pension income, as determined by Oregon’s rules, is entered on the appropriate lines or sections of the state tax form that correspond to federal adjusted gross income.

Any deductions or credits that apply, such as the Oregon Retirement Income Credit, are claimed on specific lines or schedules within the Oregon tax return. This reduces the taxpayer’s overall state income tax liability.

Oregon requires individuals to file a state tax return if their gross income meets certain thresholds for their filing status. Taxpayers can submit their Oregon return through various methods, including e-filing or mailing the completed forms.