For decades, Washington State has been known for what it doesn’t have: a state income tax. That distinction has made Washington particularly attractive for tech executives, business owners, and high-net-worth families who benefit from the combination of a thriving economy and favorable tax treatment.
That landscape is shifting. Over the past year, Washington has enacted significant changes to its capital gains and estate taxes, and state legislators have now introduced a proposed income tax on high earners that, if passed, would fundamentally alter the calculus for residents with income above $1 million.
Whether you’re a tech executive with equity compensation, a business owner weighing a liquidity event, or a retiree managing a substantial portfolio, these developments warrant careful attention. Here’s what’s changed, what’s proposed, and what it may mean for your planning.
What’s Already in Effect: The 2025 Capital Gains and Estate Tax Changes
In May 2025, Governor Ferguson signed SB 5813 into law, making two significant changes that are already affecting high-net-worth Washingtonians.
A More Progressive Capital Gains Tax
Washington’s capital gains tax, which took effect in 2022, originally imposed a flat 7% tax on long-term capital gains exceeding $250,000. The standard deduction is adjusted annually for inflation and has risen to $278,000 for 2025. The rate structure has now become graduated:
- 7% on long-term gains between $278,000 and $1 million
- 9.9% on long-term gains exceeding $1 million
This change applies retroactively to January 1, 2025. For context, when combined with the federal long-term capital gains rate (20% for high earners) and the 3.8% Net Investment Income Tax, Washington residents selling concentrated stock positions or businesses with gains above $1 million now face a combined marginal rate approaching 34%.
The standard exemptions remain in place — real estate sales, retirement account distributions, and certain small business transactions are excluded — but for those with significant equity compensation, concentrated stock, or pending liquidity events, this rate increase is material.
A Higher Estate Tax Exemption — With a Higher Top Rate
The estate tax changes, effective July 1, 2025, present a more nuanced picture. The exemption amount increased from $2.193 million to $3 million, providing relief for estates in that range. However, the top marginal rate increased from 20% to 35% for taxable amounts exceeding $9 million above the exemption.
That 35% rate makes Washington’s estate tax among the highest of any state in the nation.
Perhaps more significantly, Washington still does not allow portability of the estate tax exemption between spouses. Under federal law, a surviving spouse can inherit any unused portion of their deceased spouse’s exemption. Washington offers no such provision. Without proper planning, a married couple could permanently lose one spouse’s $3 million exemption, resulting in substantial unnecessary state estate tax.
What’s Proposed: The Washington Millionaires Tax
On February 3, 2026, legislative leaders introduced SB 6346 (and its House companion HB 2724), proposing a 9.9% income tax on Washington residents with more than $1 million in annual income. The bill is moving through the 60-day legislative session, which ends March 12, 2026.
Here are the key structural elements from the legislative draft:
Who Would Be Affected
The tax would apply to Washington residents — defined as either someone domiciled in the state, or someone who maintains a place of abode in Washington and is present more than 183 days per year. A domiciliary can avoid Washington tax residency only by maintaining no permanent abode in the state, maintaining one elsewhere, and spending 30 or fewer days in Washington during the tax year.
For those who meet the residency threshold and have income exceeding $1 million, the 9.9% rate would apply to the excess.
How Income Would Be Calculated
The proposed tax starts with federal adjusted gross income and makes several adjustments relevant to high earners:
- Capital gains coordination: Long-term capital gains already included in federal AGI would be removed and replaced with Washington capital gains as defined under the existing capital gains tax. A credit would be available for Washington capital gains taxes already paid, preventing double taxation on the same gains.
- Out-of-state municipal bonds: Interest from municipal bonds issued outside Washington would be added back to income (Washington bond interest would remain exempt).
- Business taxes: B&O taxes deducted from federal income would be added back, with a corresponding credit for B&O taxes paid on income included in the Washington tax base.
Deductions and Credits
The bill provides a $1 million standard deduction per individual. Notably, married couples would share a combined $1 million deduction regardless of filing status — not $2 million. An additional charitable deduction of up to $50,000 would be available. For married couples or domestic partners, the combined charitable deduction is limited to $50,000 regardless of filing status; unmarried individuals each receive a separate $50,000 deduction.
Credits would be available for income taxes paid to other states, Washington capital gains taxes, B&O taxes, and taxes paid through the pass-through entity election. However, these credits would not be refundable and could not be carried forward to other tax years.
Timing
If enacted as drafted, the tax would take effect January 1, 2028, with first returns due in April 2029 and estimated tax payments beginning in July 2029.
What This Could Mean for Your Planning
While the proposed income tax has not been enacted and may be amended or defeated, the combination of existing changes and potential future changes creates a planning environment that rewards proactive analysis.
For Those with Equity Compensation or Concentrated Stock
The graduated capital gains tax is already in effect, meaning large equity dispositions in 2025 and beyond face the 9.9% rate on gains exceeding $1 million. For executives considering tender offers, IPO liquidity, or diversification of concentrated positions, the timing and sizing of sales now directly affects state tax liability.
If the income tax passes with its proposed 2028 effective date, ordinary income from equity compensation — RSU vesting, disqualifying ISO dispositions, and similar events — would become subject to the 9.9% rate for those above the threshold. Planning the timing of income recognition events relative to the potential 2028 effective date may warrant consideration.
For Those Considering Roth Conversions
Washington currently imposes no tax on Roth conversions. If the millionaires tax passes, conversions executed after January 1, 2028 could be subject to the 9.9% rate for those with income above $1 million.
This creates a potential window: conversions completed in 2026 and 2027 avoid any Washington tax cost under the current law, while conversions in 2028 and beyond would likely carry an additional state burden if the proposed tax is enacted as drafted. For clients with substantial traditional IRA balances who were already considering multi-year conversion strategies, the calculus may have shifted.
Of course, conversion decisions involve numerous factors beyond state taxes — federal bracket management, Medicare premium surcharges, the impact on other deductions, and long-term assumptions about future tax rates. The potential Washington tax is one input among many, not a standalone decision driver.
For Business Owners and Pass-Through Entities
Washington does not currently offer a pass-through entity (PTE) tax election. However, the proposed SB 6346 would create one if enacted. A PTE election would allow qualifying businesses to pay state-level taxes at the entity level and claim a corresponding federal deduction — a partial workaround to the federal SALT deduction cap.
Under the proposed income tax, pass-through income would be included in an owner’s Washington taxable income, but a credit would offset taxes paid through the PTE election. The interaction between these provisions would require careful modeling for business owners evaluating their optimal structure.
For Estate Planning
The federal estate tax exemption is now permanently set at $15 million per person ($30 million for married couples) following the passage of the One Big Beautiful Bill Act in July 2025. For most families, federal estate tax exposure has been substantially reduced.
Washington’s estate tax, however, applies at a much lower threshold. With a $3 million exemption, no portability, and a top rate of 35%, Washington estate tax remains a significant planning consideration for families with assets above the exemption.
The asymmetry between federal and state thresholds also creates opportunity: because Washington does not impose a gift tax, lifetime transfers can reduce the Washington taxable estate without triggering state transfer tax. For families with long time horizons, systematic gifting programs may provide meaningful estate tax mitigation,though such strategies involve trade-offs including loss of control over transferred assets and should be evaluated in the context of the donor's overall financial plan.
For Those Evaluating Residency
The proposed income tax’s residency definitions establish specific thresholds that may be relevant for those with connections to multiple states. The 183-day presence test (which applies to anyone maintaining a place of abode in Washington) and the narrow 30-day safe harbor for domiciliaries create bright lines that would require careful documentation for anyone attempting to establish or maintain non-resident status.
Residency decisions involve far more than tax — family, community, lifestyle, and professional considerations typically dominate. But for those already contemplating a move or who maintain homes in multiple states, understanding the proposed rules is prudent.
Keeping Perspective
Tax planning is most effective when it serves broader financial and life goals, not the other way around. Changes to Washington’s tax structure — both enacted and proposed — are meaningful inputs to planning decisions, but they rarely justify upending otherwise sound strategies.
What these developments do warrant is informed analysis. For high earners and high-net-worth families in Washington, the combination of a graduated capital gains tax, elevated estate tax rates, and a potential income tax creates a more complex environment than the state has historically presented. Understanding how these pieces interact with federal tax rules, your specific income sources, and your long-term objectives is the foundation for making sound decisions.
Next Steps
If you’re uncertain how these changes might affect your situation — or if you haven’t revisited your tax, estate, or investment strategy in light of recent developments — a conversation with a qualified advisor can help clarify your options.
If you’d like to discuss how Washington’s evolving tax landscape may affect your planning, we’d welcome the conversation.