Washington has a new capital gains tax. The tax may sound like old news, as it was signed into law during the 2021 Washington legislative session and became effective on January 1, 2022. However, the first tax payments were not due until April 18, 2023. Legal challenges to the tax have worked their way through Washington’s courts, culminating in a March 2023 Washington State Supreme Court decision ruling that the excise tax imposed on capital gains is valid and does not violate our state constitution. Now, Washingtonians must figure out if and when they need to pay this tax.
Who must pay Washington’s capital gains tax?
The tax appears simple at first glance: Individuals who reside in Washington during a year when they have more than $250,000 in capital gains must pay a seven percent tax on the capital gains. RCW 821.87.040(1) provides: “Only individuals are subject to payment of the tax, which equals seven percent multiplied by an individual’s Washington capital gains.” The law requires only individuals who owe the capital gains tax to file a return with the Washington Department of Revenue. However, like nearly all taxes, there are exceptions and deductions that somewhat limit its applicability.
Washington’s capital gains tax includes three categories of deductions, which serve reduce the amount of capital gains subject to the Washington tax.
- Standard deduction. A $250,000 standard deduction per individual is found at RCW 82.87.060. Married couples and registered domestic partners do not get to each claim a $250,000 deduction, however. Instead, couples get a combined $250,000 deduction, whether they file joint or separate federal income tax returns. The standard deduction amount will be adjusted each year, based on the consumer price index. RCW 82.87.150.
- Qualified family-owned small business deduction. Capital gains related to the sale of qualifying family businesses are not subject to the tax. RCW 82.87.070 creates a deduction for capital gains derived from the sale of a “qualified family-owned” small business. This deduction applies to the sale of an individual’s interest in a sole proprietorship, or in a LLC or other business entity, as long as it meets the “qualifying interest” requirements for family ownership in the statute and the business had gross revenue of less than $10 million in the twelve months leading up to the sale. The statute does not limit the total deduction for capital gains from such sales.
- Charitable deduction. Charitable donations can reduce the amount of capital gains tax. RCW 82.87.090 creates a deduction for donations to “qualified organizations” during the same taxable year as the capital gains that exceed the minimum qualifying charitable donation amount. The minimum qualifying charitable donation amount is set to mirror the standard deduction, starting at $250,000, and set to adjust at the same rate as the charitable deduction. The statute limits the maximum charitable donation deduction to $100,000.
Washington’s capital gains tax also includes several categories exemptions from the tax. The exemptions are found at RCW 82.87.050 and include transactions involving the following:
- Real estate.
- Interests in privately-held entities where the capital gain is attributable to the sale or exchange of real estate.
- Certain types of retirement accounts.
- Assets subject to condemnation or that are transferred due to an imminent threat of condemnation.
- Cattle, horses, and breeding livestock under certain circumstances.
- Business assets are considered depreciable under the federal tax code.
- Timber, timberlands, and capital gains from dividends or distributions from real estate investment trusts related to timber or timberland.
- Commercial fishing privileges.
- Goodwill received from the sale of an auto dealership.
Where does the tax go?
Funds collected by the state from the capital gains tax will be used to fund K-12 education, early childhood education, and building or repairing school buildings. The first $500 million collected under the capital gains tax each year is designated to the education legacy trust account, where funds collected from Washington’s estate tax are also deposited. Funds collected in excess of $500 million under the capital gains tax each year are designated for deposit in the common school construction account. According to the Seattle Times, the Washington Department of Revenue had collected $849 million in capital gains tax as of early May 2023.
Do you have a question about how Washington’s capital gains tax might impact your estate planning or business? We’re happy to help.
This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.