Washington State has remained one of just eight states in the US that do not collect any form of state income tax. In recent years, this great perk has come under fire. Although the outcome is still being challenged in the Washington State Supreme Court, a tax resembling an income-tax is now being implemented and tax liability being collected for the 2022 tax year.
The History of Income Taxes in Washington, in Short
The battle to maintain Washington’s income-tax-free status has historically fallen in favor of the people. The state’s constitution is unique, protecting residents against any form of graduated income tax bracket. Throughout Washington state history, several governors have introduced legislation attempting to impose a state-income tax, but none have been successful.
For a state income-tax to be imposed, an amendment to the constitution will be required. The necessary amendment has been proposed six times – 1934, 1936, 1938, 1942, 1970 and 1973. All of which were denied.
A Battle Map for Washington’s Capital Gains Excise Tax
In 2021, Governor Jay Inslee signed legislation that creatively imposed a Capital Gains Excise Tax on Washington’s residents, effective for the 2022 tax year. The basis of this legislation is that the tax is not an income-tax, but instead it is an excise tax, a tax on property, in which your income is defined as property. I’ll spare the details of the tax itself for later in this article.
The legislation was immediately challenged in the Douglas County Supreme Court. In the March 2022 court case Quinn v. State of Washington, the legislation was determined to be unconstitutional and invalid due to its resemblance to an income-tax and it’s violation of the uniformity provision . The state appealed the decision, and the outcome of that appeal is still unresolved.
On November 30, 2022, the Washington State Supreme Court issued a stay on the Douglas County Supreme Court ruling, allowing the Washington State Department of Revenue to begin collecting the new Capital Gains Excise tax while we await the court’s final decision. It is unclear at this point whether the Capital Gains Excise tax is to be upheld. If so, this may open the door for other forms of income to be similarly taxed at the state level.
What You Need to Know
The Washington State Excise tax is 7% tax on net capital gains in excess of $250,000, effective for the 2022 tax year. This tax is imposed on individuals, which includes income reported from pass-through entities.
There is a long list of gains that are exempt from this tax, most notably any gain from real estate transactions or the sale of business property. It is clear that the main target is gains from investment assets, but a close examination of the listed exemptions is recommended before any significant transactions causing large amounts of gain.
Although the outcome is still pending, the Washington State Department of Revenue will be collecting on the new Capital Gains Excise Tax for the 2022 tax year. The deadline for filing is on April 15th, 2023. If the tax is repealed by the court, these tax payments will be refunded.
If there is a tax liability due, you will need to file a Washington State Excise Tax Return along with your Federal Tax Return. The filing deadline mimics the federal filing deadline. If your federal return is extended, the Washington State Excise Tax Return will be automatically extended.
The forms are not yet available but will be setup for e-File come February of 2023. Taxes for the 2022 tax year will be due April 15, 2023.
If you have any questions or would like to discuss your individual tax situation, please don’t hesitate to reach out.
Cody Beaumont, CPA, CFP®