Planning for Oregon’s New State Taxes

KEY INSIGHTS

Residents of Portland, Oregon, and the surrounding area (within Multnomah County) have two new income taxes effective January 1st, 2021:

• The Metro Tax is a 1% personal income tax on income over $125K for single filers and $200K for joint filers.
• The Multnomah County Tax is 1.5% on income over $125K for single filers and over $200K for married filers.  The tax rate for income above $250K (single filers) and $400K (married filers) is 3%.  In 2026, these tax rates are set to increase by 0.8%.

WHAT ARE THE CURRENT OREGON STATE INCOME TAX RATES?

Oregon’s personal income tax is progressive, but mildly so. Marginal tax rates start at 5% and, as a taxpayer’s income goes up, rates quickly rise to 7% and 9% percent, topping out at 9.9% for income over $250K.  With the addition of these two new taxes, high income residents of Multnomah County will now pay a total of 13.9% in taxes on income over $400K, rising to 14.7% in 2026.

WHAT IS THE NEW “METRO” TAX?

Effective January 1, 2021, the Portland Metro Supportive Housing Services Income Tax provides funding for housing services for persons experiencing, or who are at risk of experiencing, homelessness in the metro area.  The program is funded by two separate taxes:

• An income tax on net income of businesses with gross receipts above $5M.
• A personal income tax of 1% on taxable income above $125K for single filers and $200K for married filing jointly.

WHAT IS THE NEW MULTNOMAH COUNTY TAX?

Effective January 1, 2021, the Multnomah County Preschool for All Income Tax provides funding to establish a tuition-free preschool program.  The program is funded by a personal income tax based on the following thresholds:

• Single taxpayers: All Oregon taxable income over $125K is taxed at 1.5%.  All income above $250K is taxed at 3%.  In 2026, the tax rate increases by 0.8%
• Joint filers: All Oregon taxable income over $200K is taxed at 1.5%.  All income above $400K is taxed at 3%.  In 2026, the tax rate increases by 0.8%.

ARE EMPLOYERS WITHHOLDING FOR THESE NEW TAXES?

In 2021, withholding is voluntary.  However, an employer must offer to its employees in writing to withhold the Multnomah County personal income tax from the employees’ wages as soon as the employer’s payroll system(s) can be configured to capture and remit the taxes withheld.

Beginning January 1, 2022, and each year thereafter, withholding is mandatory for all subject employees earning $200,000 or more during the calendar year, unless the employee opts out.

WHAT CAN I DO TO REDUCE EXPOSURE TO THESE NEW TAXES?

It’s very difficult to avoid a tax that applies to all income.  If you are married, you may want to ask your CPA to see if married filing separately would reduce your exposure to these new taxes.  However, if you have dependent children, the tax savings may be offset by fewer family-oriented credits available to reduce your income tax liability.  Nonetheless, if you’re a high earner, it might be worth the extra effort to calculate your returns both jointly and separately to see which will save you more.

Also, if you work remotely, ask your CPA whether this tax will apply to you.  The new law states that “all Oregon taxable income of Multnomah County residents” is subject to the tax.  If you live outside of Multnomah County, only Multnomah County-sourced income is subject to the tax.  If employees are working remotely (outside of Multnomah County) for a Multnomah County employer, their wages may not be subject to the tax or may be prorated based on time “in the office” vs. working remotely.

Finally consider these three evergreen strategies for reducing the amount of overall taxes you owe:

Max out contributions to your retirement accounts:  Pre-tax contributions to workplace retirement savings plans and IRAs reduce your current taxable income.  In 2021, you can contribute up to $19,500 to 401(k), 403(b) and most 457 plans.  People aged 50 or over can generally contribute another $6,500 per year.

Harvest tax losses to offset capital gains:  Harvesting losses in the same year as your gains will reduce your taxable income.  If you plan to sell investments which have appreciated significantly, consider selling others that have lost value.  If your losses exceed your gains, you can deduct them on your tax return, up to $3,000 per year.  Additional loss amounts can be carried forward to offset gains in the future.

Charitable Gifting:  Gifts to non-profits create tax advantages.  Here are some specific strategies that can help maximize your tax savings.

• Donate long-term appreciated securities rather than selling them and then donating the proceeds.  This will allow you to donate and deduct the full value of the investment without paying capital gains tax (subject to AGI limitations).  On the other hand, shares that have lost value should be sold before donating them, to allow you to record a capital loss, which reduces your taxable income.
• Set up a Donor Advised Fund (DAF)– Also known as a Charitable Gift Fund, a DAF is a simple and inexpensive option for gifting both cash and highly appreciated securities.  Contributions to a DAF create an immediate tax deduction.  Donors can then grant funds to charities immediately or over several years.
• Bundle your deductions– With the increase in the standard deduction to $25.1K (for married taxpayers) and $12.55K (for single taxpayers), bundling your deductions may help reduce your tax bill.  For example, making a large donation in one year instead of annual small donations may enable you to receive a greater tax benefit.
• Donate your IRA RMD directly to charity– After reaching age 72, IRA owners must take an annual Required Minimum Distribution (RMD) from their account.  By donating up to $100K of that RMD amount directly to charity, you can exclude that money from your taxable income.

There is no silver bullet for avoiding these new state income taxes, but thoughtful tax planning can help reduce your overall tax burden.  As always, please contact your advisory team for recommendations specific to your tax situation.