UPDATE: Direct File Oregon updated to calculate Oregon Kids Credit correctly

Direct File Oregon has been updated and is available to correctly calculate eligibility and credit amounts for taxpayers claiming the Oregon Kids Credit and one or more of the new federal tax deductions for overtime wages, tips, and new car loan interest, the Department of Revenue announced today.

Direct File Oregon is an interview-based tax preparation software that allows taxpayers to file their Oregon personal income tax returns for free directly with the state.

Friday, the department offered taxpayers who claim the Oregon Kids Credit new guidance that included a recommendation to wait to file until tax preparation software could be updated.

During preparation for the 2026 tax season, the department provided incorrect information on tax form instructions and to tax preparation software partners regarding calculations for claiming the Oregon Kids' Credit. As a result, a small number of taxpayers who are not eligible for the Oregon Kids Credit calculated and claimed the Oregon Kids Credit on their returns. An additional small number of taxpayers who are eligible to claim the Oregon Kids Credit claimed too large of a credit.

The department identified the error among some of the earliest returns submitted when processing of e-filed returns opened Monday. Through Friday morning, the agency had processed about 135,000 tax year 2025 returns. The new federal deductions impacted Oregon Kids Credit eligibility on fewer than 500 of those returns. While the department expects that number to grow before all tax filing software vendors update to fix the calculation, it anticipates that the total number of affected returns will remain low.

Taxpayers who have already filed returns and believe they may be impacted do not have to take any action to correct their returns. DOR is automatically adjusting returns, and will notify taxpayers of any adjustments. Taxpayers will receive this notice in the mail, as well as in their Revenue Online account.

"The Oregon Kids Credit benefits some of the lowest-income families in the state," Department of Revenue Director David Gerstenfeld said. "We are notifying each affected taxpayer and letting them know they don't need to take any action. We will make the correction to their return, but we also want to manage taxpayers' expectations. Unfortunately, their refund may be less than they anticipated. We know that a difference of even $100 can be very impactful for low-income families with young children, and we sincerely apologize for the error."

The error centers around how the new federal income tax deductions for overtime wages, tips, and new car loan interest affects Oregon taxpayers' modified adjusted gross income (MAGI) as it relates specifically to eligibility for the Oregon Kids Credit on their state return. The deductions were part of House Resolution 1, also known as the One Big Beautiful Bill, passed by Congress and signed into law after the 2025 Oregon Legislative session ended. The federal legislation made major changes to tax law that were quickly incorporated into DOR forms, instructions, and processes. The agency monitors each filing season closely and identified the error and solution within days of the season start.

The department corrected the error in its online tax form instructions and Direct File Oregon. It has contacted tax preparation software providers so that they can do the same.

The department recommends that taxpayers who plan to claim one or more of these new deductions and have not yet filed their returns use Direct File Oregon, or wait until the tax filing software product they use, has been updated.

Answers to frequently asked questions are available on the department's website along with agency contact information for affected taxpayers. The new webpage will be updated as software providers complete their updates. Taxpayers with questions can call 503-947-0350 or email [email protected].

The Oregon Kids Credit is a refundable credit for low-income people with young dependent children. For those with MAGI of $26,550 or less, the full credit is $1,050 per child for up to five dependent children under the age of six at the end of the tax year. A partial credit is available for individuals and families with MAGI up to $31,550.