In March, Washington Gov. Bob Ferguson signed into law S.B. 6346 and S.B. 6347, two bills that will change the state’s income and estate tax landscape.
S.B. 6346 will impose a new tax on high-income individuals and S.B. 6347 will revert the estate tax rates to pre-2025 levels, with the top rate lowered from 35% to 20% for decedents dying on or after July 1, 2026.
Overview
Effective January 1, 2028, S.B. 6346 introduces a 9.9% tax on Washington taxable income exceeding $1 million per household. The tax applies broadly to Washington residents, part-year residents, and nonresidents with Washington-source income. Therefore, it could apply to individuals residing outside Washington with business interests, investment income, employment compensation, or pass-through entity income connected to Washington.
The $1 million threshold operates as a standard deduction shared between spouses and registered domestic partners and indexed for inflation every other year beginning in 2029. For individuals who are not Washington residents for the entire tax year, the deduction is prorated based on the ratio of Washington base income to federal adjusted gross income (AGI).
The first returns and final payments would be due in 2029 for tax year 2028, with estimated tax payments beginning July 1, 2029, generally following the federal estimated tax framework under Internal Revenue Code Section 6654. However, no estimated tax payments are required if the annual tax liability is less than $5,000.
S.B. 6347 reduces the estate tax rates to pre-2025 levels, lowering the top rate from 35% to 20% for decedents dying on or after July 1, 2026. The higher estate tax rates were in effect for only one year for decedents dying on or after July 1, 2025. S.B. 6347 retains application of the tax to estates of at least $9 million with a $3 million exclusion. The exclusion amount will not adjust for inflation.
Taken together, legislative developments such as S.B. 6346 and the enactment of Washington’s capital gains tax illustrate the state’s evolving approach to the taxation of high-income individuals; however, S.B. 6347 reflects a degree of moderation.
As the state continues to refine its tax policy, individuals with significant Washington income, investments, and interests should evaluate the potential impact of those changes and consider whether there might be proactive planning opportunities available before the January 1, 2028, effective date.
Special Millionaires’ Tax Rules
S.B. 6346 includes key modifications for calculating Washington taxable income. Some of those modifications require the adding back of capital gains taxes; income from incomplete non-grantor (‘ING’) trusts; and owners’ distributive shares of pass-through entity tax (PTET) expense deducted from federal AGI incurred by a pass-through entity pursuant to the PTET election, which S.B. 6346 created.
Several offsetting credits are available to mitigate double taxation: those for capital gains tax, business and occupation or public utility taxes, other state income tax, and PTET payments. Those non-refundable credits cannot be carried forward to a subsequent tax year.
Only the Washington-source income of nonresident individuals is subject to the millionaires’ tax. To determine what constitutes Washington-source income, S.B. 6346 provides a nuanced allocation and apportionment framework. Part-year residents must allocate income between Washington residency and non-residency periods. During residency periods, individuals include total AGI, while during non-residency periods, they include only Washington-source income.
As noted, S.B. 6346 introduces a PTET election to allow partnerships, limited liability companies classified as partnerships, and S corporations to pay the millionaires’ tax at the entity level on behalf of qualifying owners. Electing entities must file annual returns and pay the tax at the entity level, including making estimated tax payments beginning July 1, 2029. Owners receive credits for their shares of the tax paid by the electing entity.
Constitutionality Concerns
The constitutionality of S.B. 6346 is unclear. Legal challenges are anticipated and could affect the tax before its January 1, 2028, effective date. Taxpayers should monitor legal developments to determine the potential impact when implementing tax or residency planning decisions in direct response to the legislation.
BDO Insights
- Given the complexity of the sourcing and apportionment rules, available credits, and interaction with Washington’s capital gains tax regime, early modeling of and strategic planning for the millionaires’ tax will be critical.
- Taxpayers also should consider other aspects of the bill, such as its broad applicability, $1 million standard deduction, and provisions adding back income from ING trusts.
- Individuals with significant Washington income might want to evaluate whether changing domicile and/or residency before the bill’s effective date is appropriate. Given the potential tax exposure, domicile and residency determinations will likely receive heightened scrutiny from Washington tax authorities. Individuals considering relocation should be prepared to support changes in domicile/residency with clear objective evidence, including property ownership, voter registration, driver’s license, and time spent in every state.
- Taxpayers anticipating significant liquidity events such as business sales, large investment gains, or equity compensation events should evaluate whether transaction timing before the January 1, 2028, effective date could reduce exposure to the millionaires’ tax.
Please visit BDO’s State & Local Tax Services pages, specifically that for Income, Franchise, and Gross Receipts Taxes, as well as the Private Client Services page, for more information on how BDO can help.