Does Oregon Tax Tips in 2026?
No - Oregon does not tax tips that qualify for the federal OBBBA deduction in 2026. Oregon uses rolling IRC conformity, and the 2025 OR-40 instructions explicitly cite the OBBBA tips deduction as allowable on Oregon returns. The tips deduction (IRC §224, up to $25,000) reduces federal AGI, which flows through to reduce Oregon taxable income. With Oregon’s graduated rates reaching up to 9.9%, Oregon tip workers can see substantial state tax savings - potentially $2187.50 or more for workers in the 8.75% bracket claiming the full deduction.
How Oregon's Tips Tax Treatment Works
Oregon conforms to the OBBBA tips deduction through its rolling IRC conformity for changes to the definition of federal taxable income. The 2025 OR-40 instructions explicitly confirm this, stating: "New federal deductions. You may be able to claim the same deductions for tip income, overtime wages, and passenger vehicle loan interest that you are claiming on your federal return." This is one of the clearest state-level confirmations of OBBBA conformity.
Oregon computes its income tax starting from federal adjusted gross income (AGI), then applies Oregon-specific modifications (including Oregon’s own standard deduction, which is much lower than the federal deduction, and the federal income tax subtraction). The OBBBA tips deduction is an above-the-line deduction that reduces federal AGI before Oregon’s calculation begins. This means the deduction is already reflected in Oregon’s starting point.
Oregon’s graduated rate structure makes the state tax savings particularly significant. With four brackets ranging from 4.75% to 9.9%, most working tip earners fall in the 8.75% bracket ($11,400 - $125,000 for single filers). This is one of the highest marginal rates in the nation for middle-income earners, meaning Oregon tip workers receive proportionally larger state tax savings from the tips deduction compared to flat-rate or lower-rate states.
Federal Tips Deduction Quick Reference
| Detail | Value |
|---|---|
| IRC Section | §224 (OBBBA) |
| Maximum deduction | $25,000 tips |
| Deduction type | Above-the-line (Schedule 1-A) |
| FICA still applies? | Yes (Social Security 6.2% + Medicare 1.45%) |
| MFS eligible? | No (MFJ or Single/HoH only) |
| Effective dates | Jan 1, 2025 – Dec 31, 2028 |
| Oregon treatment | Conforms |
Worked Examples Comparing Federal and Oregon Treatment
Example 1: Restaurant server with $18,000 base pay + $20,000 in tips (single filer, 12% federal bracket)
Qualified tip income: $20,000
Tips deduction claimed: $20,000 (capped at $25,000)
Estimated federal tax savings: $2,400.00
Oregon return:
State tax savings from deduction: $1,750.00
Oregon’s graduated rates mean this server’s $38,000 total income falls in the 8.75% bracket ($11,400 - $125,000 for single filers). The $20,000 tips deduction reduces Oregon taxable income within this bracket, saving approximately $1750.00 in Oregon state tax. Oregon’s high marginal rates make the state savings significantly larger than in flat-rate states.
Example 2: Bartender earning $35,000 in tips (single filer, 22% federal bracket)
Qualified tip income: $35,000
Tips deduction claimed: $25,000 (capped at $25,000)
Estimated federal tax savings: $5,500.00
Oregon return:
State tax savings from deduction: $2,187.50
The federal tips deduction is capped at $25,000. This worker’s income falls within Oregon’s 8.75% bracket, so the full capped deduction saves approximately $2187.50 in Oregon state tax. The 2025 OR-40 instructions explicitly cite OBBBA deductions as allowable for Oregon returns.
Oregon-Specific Rules and Considerations
High marginal rates - large state savings: Oregon’s 8.75% bracket covers a wide income range ($11,400 - $125,000 for single filers), meaning most tip workers benefit at this rate. At 8.75%, the state tax savings from the tips deduction is among the highest in the nation. A worker claiming the full $25,000 deduction saves approximately $2187.50 in Oregon income tax.
Paid Leave Oregon payroll tax: Unlike many states, Oregon imposes a payroll tax through Paid Leave Oregon. The employee share is 0.6% of gross wages with no wage cap. This tax applies to tip income regardless of the OBBBA deduction. Combined with federal FICA, Oregon tip workers face 6.2% + 1.45% + 0.6% = 8.25% in payroll taxes on all tips.
Oregon Statewide Transit Tax: Oregon’s Statewide Transit Tax (STT) is a separate 0.1% tax on wages that applies to tip income. This is a payroll tax and is not affected by the OBBBA tips deduction.
Kicker refund interaction: Oregon’s unique kicker surplus credit is based on actual Oregon tax liability. The tips deduction may slightly reduce future kicker amounts, but the net benefit of the deduction far exceeds any kicker reduction.
No sales tax offset: Oregon is one of five states with no sales tax. This means the tips deduction represents a pure income tax benefit without any offsetting consumption tax considerations. Oregon tip workers keep more of their deduction benefit compared to states where higher take-home pay faces sales tax.
Related Tools
- No Tax on Tips Calculator - calculate your federal tips deduction
- Oregon Tax Guide - full state tax overview
- Oregon Paycheck Calculator
- Does Oregon Tax Overtime?
- W-2 Code TP: Tips Reporting Guide
- W-2 Code TT: Overtime Reporting Guide
- All 51 States: Tips & Overtime Tax Map