Washington state has no personal income tax and Oregon has no sales tax, so living in the former while working in the latter may appear to be the key to a tax-free existence. This is not the case in reality, but there are still tax benefits for this living and working situation. Vancouver, Washington and other nearby border cities offer easy commutes to Portland, often with lower-cost housing as well as access to tax-free shopping.
Washington residents who work in Oregon must pay Oregon state income taxes, filed with form 40N, Oregon's nonresident tax form. The personal income tax benefit in this situation occurs only if you work partly in Oregon and partly in Washington, or if your spouse or other household members live with you in Washington and work in that state also. In that circumstance, you only pay personal income taxes for the work you do in Oregon. Your Washington work is subject only to federal income taxes and local, state and federal payroll taxes.
Retail Sales Tax
Washington residents who live near the Oregon border frequently take advantage of the sales-tax-free shopping in Oregon. If you work in that state, you can pick up groceries and other items easily on your way home from work, avoiding the sales tax you would pay in Washington for the same items. However, expensive items such as cars, boats and recreational vehicles may be subject to Washington taxes when you register them in Washington.
The same federal income taxes apply to both Oregon and Washington, so you receive no direct tax benefits from living and working in either location. However, if you live in Washington and work in Oregon, you can deduct the Oregon state income taxes you paid when filing your federal tax return. Washington workers don't get this deduction since they have no paid state taxes to deduct.
Oregon taxes all types of income, including tips, interest and unemployment benefits as well as your wages. While you must file income taxes with Oregon state on your tips and other income earned there, your bank account and other interest accounts will remain tax free on the state level if they are based in Washington. As with other items, you are still responsible for federal taxes on all income types, but you will save yourself the trouble of filing information twice, once at the state and once at the federal level, by living in Washington.