New tax law for wealthy in Washington.

The state of Washington has recently implemented a new tax law that has been dubbed the "millionaires tax." This bill was passed by the Washington legislature and signed into law by Governor Ferguson just yesterday. Starting in 2028, individuals with high incomes residing in Washington will be subject to a 9.9% income tax. However, the first tax return for this new law will not be due until 2029.

For those who will be affected by this new tax, it's important to understand how it works and what options are available for planning ahead. Many people assume that this state income tax will operate like a traditional income tax system with different brackets, marginal rates, and complex rules. However, this is not the case.

The Washington millionaire's tax is actually a flat tax with a standard deduction that applies to everyone. The tax formula is fairly simple. First, a taxpayer's federal adjusted gross income is used as a starting point.

Then, a few adjustments specific to Washington are made before subtracting a $1,000,000 deduction. Any remaining income is then taxed at a flat rate of 9.9%. It's important to note that the $1,000,000 deduction is per household and is adjusted for inflation every other year.

This deduction essentially replaces the standard deduction or itemized deductions on a federal tax return. To better understand how this flat tax works, let's consider an example. If a taxpayer earns $2,000,000 of income, their adjusted gross income would be $2,000,000.

After subtracting the $1,000,000 deduction, their taxable income would be $1,000,000. Using the flat tax rate of 9.9%, their tax would amount to $99,000. However, as you dig into the details, this flat tax becomes more complex.

This is because of the adjustments that are made in step 2 of the formula. While the tax starts with federal adjusted gross income, it is then modified to create what is known as "Washington base income" and eventually "Washington taxable income." These adjustments not only complicate the tax, but also provide opportunities for planning. Some of the key modifications to the tax formula include adjustments to long-term capital gains, the addition of tax-exempt state and municipal bond interest, and the addition of deducted state taxes.

These adjustments are made to prevent double taxation and to keep the tax system coordinated. There are also some niche adjustments in the statute, such as provisions for incomplete nongrantor trusts, tribal income, and capital construction funds. While these may not apply to most taxpayers, they demonstrate the comprehensive nature of the law.

The millionaire's tax also provides credits for certain taxes already paid. For example, businesses and individuals can receive credit for certain taxes already levied by Washington state, as well as for income taxes paid to other states. This avoids double taxation and ensures that individuals are not paying more than they should.

It's worth noting that non-residents who earn income in Washington state are also subject to this tax, but it is prorated based on the proportion of income earned in Washington. For example, if a non-resident earns $2 million in total and two-thirds of that income is earned outside of Washington, they would only pay approximately $33,000 of the millionaire's tax. Finally, there are some important qualifications to consider.

The statute mentions that the sale of residential real estate and qualified family-owned businesses will not be taxed, although this is not explicitly stated in the law. However, it is implemented through cross-referencing and is largely in line with the intention of the law. For more information on these and other aspects of the millionaire's tax, there are additional resources available to taxpayers.