### Flaw in Oregon’s formula for taxing part-year residents?

Posted:

**Sun Mar 10, 2019 6:33 pm**Hoping someone savvy with taxes can help clarify if my analysis is correct here. The outcome of this will impact whether I decide to do a Roth conversion this year.

Oregon says that only income earned as a resident of Oregon (or Oregon-sourced income earned as a non-resident) is subject to Oregon state income tax. Presumably, this means that a certain amount of Oregon income is taxed the same way (i.e., at the same % rate) regardless of whether you have additional income in another state. However, in looking at how they structure the calculation approach to determine state income tax on their Form OR-40-P (part-year resident), it would seem this is not the case. Specifically, it seems that a given amount of Oregon income will be taxed at a higher effective rate if there is additional non-Oregon income. And the more non-Oregon income there is, the higher the effective tax rate on the Oregon income.

If this is true, then I would not do the conversion this year. I was an Oregon resident in Jan and Feb, and a Florida resident (no state income tax) starting March 1 thru the rest of the year. So the vast majority of my federal income will not be for Oregon. By delaying the conversion until now, my goal was to avoid any state income taxes on it, but alas I feel the formula they use will indirectly result in some of it being taxed by the state (in the form of my actual Oregon income being taxed at a higher effective rate).

Basically, the formula used on OR-40-P is to determine what ones Oregon tax would be based on a two-step process: 1. First, determine what the Oregon tax would be based one’s federal income for the year, and then 2. apply a % to that total tax that reflects how much of that income was earned in Oregon. The flaw, it seems, is that this will result in those who have very little income in Oregon and a lot in another state effectively suffering the consequence of their non-linear (progressive) tax code and effectively pay a higher rate for the Oregon income. It seems like the approach instead should be to simply determined one’s Oregon income and then calculate state income tax on that amount.

Here is an illustrative simplified example with some hypothetical numbers.

Let’s say Oregon’s progressive tax code was:

-For income below $20,000 the tax rate is 5%.

-For income above $20,000 the tax rate is 10%.

Let’s consider two individuals- Person A and Person B. Person A earned $20,000 while in Oregon and $20,000 while in Florida. Person B earned $20,000 entirely in Oregon. So both earned the same amount of income in Oregon, and an equitable formula would result in both paying the same amount in state taxes. But here is what Form OR-40-P would result in.

Person A:

Step 1. Oregon tax on total (federal) income = $3,000

Step 2. % of income earned in Oregon = 50%

Oregon tax = $3,000 x 50% = $1,500

Effective Oregon tax rate = $1,500/$20,000 = 7.5%

Person B:

Oregon tax on income = $1,000

Effective Oregon tax rate = $1,000/$20,000= 5%

So, despite having the same amount of Oregon income ($20,000), the person who has additional income outside of Oregon pays more tax on the same income earned in Oregon.

Am I missing something? Is this the intent? Sure doesn’t seem fair.

Thank you

Oregon says that only income earned as a resident of Oregon (or Oregon-sourced income earned as a non-resident) is subject to Oregon state income tax. Presumably, this means that a certain amount of Oregon income is taxed the same way (i.e., at the same % rate) regardless of whether you have additional income in another state. However, in looking at how they structure the calculation approach to determine state income tax on their Form OR-40-P (part-year resident), it would seem this is not the case. Specifically, it seems that a given amount of Oregon income will be taxed at a higher effective rate if there is additional non-Oregon income. And the more non-Oregon income there is, the higher the effective tax rate on the Oregon income.

If this is true, then I would not do the conversion this year. I was an Oregon resident in Jan and Feb, and a Florida resident (no state income tax) starting March 1 thru the rest of the year. So the vast majority of my federal income will not be for Oregon. By delaying the conversion until now, my goal was to avoid any state income taxes on it, but alas I feel the formula they use will indirectly result in some of it being taxed by the state (in the form of my actual Oregon income being taxed at a higher effective rate).

Basically, the formula used on OR-40-P is to determine what ones Oregon tax would be based on a two-step process: 1. First, determine what the Oregon tax would be based one’s federal income for the year, and then 2. apply a % to that total tax that reflects how much of that income was earned in Oregon. The flaw, it seems, is that this will result in those who have very little income in Oregon and a lot in another state effectively suffering the consequence of their non-linear (progressive) tax code and effectively pay a higher rate for the Oregon income. It seems like the approach instead should be to simply determined one’s Oregon income and then calculate state income tax on that amount.

Here is an illustrative simplified example with some hypothetical numbers.

Let’s say Oregon’s progressive tax code was:

-For income below $20,000 the tax rate is 5%.

-For income above $20,000 the tax rate is 10%.

Let’s consider two individuals- Person A and Person B. Person A earned $20,000 while in Oregon and $20,000 while in Florida. Person B earned $20,000 entirely in Oregon. So both earned the same amount of income in Oregon, and an equitable formula would result in both paying the same amount in state taxes. But here is what Form OR-40-P would result in.

Person A:

Step 1. Oregon tax on total (federal) income = $3,000

Step 2. % of income earned in Oregon = 50%

Oregon tax = $3,000 x 50% = $1,500

Effective Oregon tax rate = $1,500/$20,000 = 7.5%

Person B:

Oregon tax on income = $1,000

Effective Oregon tax rate = $1,000/$20,000= 5%

So, despite having the same amount of Oregon income ($20,000), the person who has additional income outside of Oregon pays more tax on the same income earned in Oregon.

Am I missing something? Is this the intent? Sure doesn’t seem fair.

Thank you