Oregon Credit for Taxes Paid to Another State
Oregon provides a tax credit for income also taxed by another state. This overview clarifies how the credit is limited and what you need to claim it properly.
Taxpayers who earn income in one state while residing in another can face double taxation on the same earnings. To mitigate this, Oregon offers a tax credit for income taxes paid to another state, ensuring that a taxpayer’s income is not fully taxed twice. This credit provides a dollar-for-dollar reduction of a person’s Oregon income tax liability, though the reduction is subject to certain limitations.
Eligibility for the Credit
To claim the credit, a taxpayer must meet residency and income criteria. Full-year Oregon residents are generally eligible if they earn income in another state and pay income tax to that state on those same earnings. This commonly occurs when a resident works for a company in a neighboring state or sells real estate located outside of Oregon. The income must be “mutually-taxed,” meaning both Oregon and the other state have a legal right to tax it. Part-year residents calculate the credit separately for the portions of the year they were a resident and a nonresident.
For full-year Oregon residents with income taxed by Arizona, California, Indiana, or Virginia, a special rule applies. They must claim the credit on the nonresident return filed with that other state, not on their Oregon return. However, if that state disallows the credit, the taxpayer may then amend their Oregon return to claim it.
The credit is available only for state-level taxes based on net income. Other forms of taxation are excluded, such as property taxes, sales taxes, or local taxes imposed by a city or county that are not based on income. State-specific taxes based on gross receipts, like Washington’s Business and Occupation Tax, also do not qualify.
Calculating the Allowable Credit
The allowable credit is the lesser of two amounts: the actual income tax liability paid to the other state on the mutually-taxed income, or the amount of Oregon tax attributable to that same income. This limitation ensures Oregon does not provide a credit for taxes that exceed its own tax on the earnings in question. The credit can only reduce the Oregon tax owed and cannot result in a refund.
To determine the Oregon tax on the other state’s income, a specific formula is used. The taxpayer must divide the modified adjusted gross income (MAGI) from the other state by their total MAGI from all sources. This ratio is then multiplied by the total Oregon tax liability after other credits have been subtracted. The result represents the portion of the Oregon tax bill attributable to the income earned in the other state.
For example, an Oregon resident has a total MAGI of $100,000, with $20,000 of that income earned from a rental property in California. They paid $800 in California income tax on that rental income, and their total Oregon tax liability after other credits is $7,000. To calculate the Oregon tax on the California income, they would divide $20,000 by $100,000, which equals 0.20. This ratio is then multiplied by the $7,000 Oregon tax, resulting in $1,400.
The taxpayer must compare the actual tax paid to California ($800) with the calculated Oregon tax on that income ($1,400). Since the $800 paid to California is the lesser of the two amounts, their allowable credit is $800. If the tax paid to California had been $1,500, the credit would be limited to the $1,400 of Oregon tax attributable to that income. This calculation must be performed for each state to which income tax was paid.
Required Information and Forms
To claim the credit, a taxpayer must gather specific documentation. A complete and signed copy of the income tax return filed with the other state must be attached to the Oregon tax return. This document serves as the primary evidence of the income earned and the tax paid. Failure to attach these documents can lead to processing delays or the disallowance of the credit.
The credit calculation is performed on a dedicated schedule that must also be filed with the Oregon return. Full-year and part-year residents use Schedule OR-ASC, while non-residents use Schedule OR-ASC-NP. These forms are available from the Oregon Department of Revenue’s website and are included in most tax preparation software.
When completing the appropriate schedule, the taxpayer will transfer specific figures from their federal and other state returns. The form guides the user through the calculation steps, requiring them to input the MAGI from the other state, their total MAGI, and their Oregon tax liability to determine the final, allowable credit amount.
Claiming the Credit on Your Oregon Return
Once the allowable credit has been calculated on the appropriate schedule, the final amount is transferred to the main Oregon tax return. For residents filing Form OR-40, the credit amount from Schedule OR-ASC is entered on the designated line in the credits section of the form. This entry directly reduces the amount of tax the individual owes to Oregon.