There is no blanket “no tax on overtime” law in Oregon that eliminates state tax on overtime wages. What Oregon workers get instead is a federal overtime pay deduction that took effect for tax years 2025 through 2028, and because Oregon starts its income tax calculation from federal taxable income, that federal deduction lowers your Oregon tax bill automatically. Eligible workers can deduct up to $12,500 of qualifying overtime pay ($25,000 for married couples filing jointly), and no separate Oregon form is required to capture the state-level savings.
What the Federal Deduction Actually Covers
The deduction is an above-the-line deduction created by federal legislation signed in 2025. It applies to overtime paid at one-and-a-half times your regular rate for hours worked beyond 40 in a single workweek, consistent with the Fair Labor Standards Act.
Here is where most workers miscalculate the benefit. Only the premium portion of your overtime pay qualifies. That means the “extra half” of time-and-a-half, not the base-rate portion of those overtime hours.
If your regular rate is $30 an hour and your overtime rate is $45, only the $15 premium per overtime hour counts toward the deduction. The $30 base pay for that hour is taxed normally. A worker who earned $15,000 in total time-and-a-half overtime during the year would have $5,000 eligible to deduct. Someone with $1,500 in overtime would see roughly $500 qualify.
The deduction reduces taxable income rather than acting as a dollar-for-dollar credit, so your actual savings depend on your marginal tax rate.
Income Limits That Shrink or Eliminate the Deduction
The full deduction is available only if your modified adjusted gross income stays below $150,000 for single filers or $300,000 for joint filers. Above those thresholds the deduction phases out, and workers with significantly higher incomes get no benefit at all.
The cap and phase-out are meaningful. Earlier proposals would have fully excluded overtime from income with no ceiling; the enacted version is narrower on both counts.
How the Deduction Lowers Your Oregon Taxes
Oregon calculates state income tax starting from your federal taxable income. When the overtime deduction lowers that federal number, the smaller figure carries over to your Oregon return. No separate Oregon schedule, no extra form, no additional election.
This works because Oregon has not disconnected from the federal overtime deduction. If the legislature ever chose to decouple from it in a future session, Oregon would stop following the federal treatment. For the 2026 tax year, the conformity is in place and qualifying taxpayers see reduced state taxes without extra paperwork.
How to Claim It on Your Tax Return
You claim the deduction on your federal return, and the reduced taxable income flows to Oregon Form OR-40. What you need to have ready is documentation.
Your W-2 shows total wages but rarely breaks out overtime separately. Keep your pay stubs through the year. Those stubs let you identify how many hours exceeded the 40-hour weekly threshold and isolate the premium portion of the pay for each of those hours. Without that breakdown, calculating the qualifying amount is guesswork.
The deduction runs through the 2028 tax year unless Congress extends it. It is not a permanent change to the tax code.
A Note for Farmworkers and Farm Employers
Oregon has a separate program often confused with the federal deduction: a refundable tax credit for agricultural employers, created by House Bill 4002 to help farms absorb the cost of newly required overtime wages for farmworkers.1Oregon State Legislature. HB 4002 – Relating to Overtime for Agricultural Workers That credit goes to the employer, not the worker. If you are a farmworker, it does not appear on your personal tax return. Your overtime pay is still eligible for the federal deduction described above under the same rules that apply to any other worker.2Oregon Department of Revenue. Agricultural Employer Overtime Tax Credit
Federal Proposals That Could Change This
Several standalone bills in the 119th Congress would expand overtime tax relief beyond the current deduction. The No Tax On Overtime Act of 2025 would fully exclude overtime compensation from gross income rather than capping the deduction; it remained in the Senate Finance Committee as of its March 2025 introduction.3Congress.gov. S.1046 – No Tax On Overtime Act of 2025 The Overtime Wages Tax Relief Act proposes a different deduction structure with a $10,000 cap for single filers and $20,000 for joint filers, and lower phase-out thresholds of $100,000 and $200,000.4Congress.gov. S.1606 – Overtime Wages Tax Relief Act None of these standalone proposals had advanced beyond committee referral at the time of their introduction. If any pass, the size and scope of the overtime tax benefit for Oregon workers could change in future tax years.