Washington has long distinguished itself as one of the few states without a broad-based personal income tax, but that framework might soon change.
On March 11, the Washington legislature passed S.B. 6346 to impose a new tax on high-income individuals. If enacted, the bill will significantly shift Washington’s tax landscape. The same day, lawmakers also passed S.B. 6347, which would 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.
Gov. Bob Ferguson has announced his intention to sign both bills.
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 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.
General Computation for Income Subject to Millionaires’ Tax
As noted, the millionaires’ tax is imposed on individuals with Washington taxable income in excess of the applicable threshold at a rate of 9.9%. Washington taxable income begins with federal AGI and applies specific state modifications.
Key Modifications to Calculate Washington Taxable Income
- $1 Million Standard Deduction: The new tax allows a $1 million standard deduction per household (for spouses and registered domestic partners, the combined deduction is limited to $1 million, regardless of filing a joint or separate return), which is indexed annually for inflation. For individuals who are not Washington residents for the entire tax year, the $1 million standard deduction is pro-rated based on the ratio of Washington base income to federal AGI.
- Long-Term Capital Gains and Losses: Long-term capital gains and losses included in federal AGI are excluded from Washington income. Gains already subject to Washington’s capital gains tax are added back, along with the capital gains tax deduction to the extent it reduces taxable gains subject to that tax.
- State and Local Bond Interest: Also added back is interest income from state and local bonds excluded from federal AGI, except for interest from Washington state or local obligations.
- State and Local Income Taxes: State and local income taxes deducted in computing federal AGI are added back, including taxes generating business & occupation (B&O) or public utility tax credits.
- Loss Carryforward: Loss carryforwards deducted from federal AGI are added back to the extent attributable to tax years ending before the legislation’s effective date.
- Incomplete Nongrantor (ING) Trusts: Income from ING trusts is added back to Washington taxable income to the extent not otherwise included.
- Charitable Contributions: Charitable contributions claimed for the tax year are deductible up to $100,000 per individual. For spouses or registered domestic partners, the combined deduction is limited to $100,000, regardless of whether returns are filed jointly or separately.
- Pass-Through Entity Tax Payments: Owners must add back their distributive share of pass-through entity tax (PTET) expense deducted from federal AGI incurred by a pass-through entity pursuant to the PTET Election, which was created by S.B. 6346.
Available Credits to Offset the Millionaires’ Tax
Beginning in tax year 2028, several nonrefundable credits are available to mitigate double taxation:
- Capital Gains Tax Credit: Amounts paid under Washington’s capital gains tax can be credited against the millionaires’ tax imposed on the same income.
- B&O/Public Utility Tax Credit: Business owners can claim credits for B&O or public utility taxes paid on income also subject to the millionaires’ tax.
- Other State Income Tax Credit (OSTC): Resident individuals can claim credits for income taxes paid to other states on income also subject to the millionaires’ tax. The OSTC applies only to taxes paid to another state by an individual or pass-through entity in which the individual is an owner on income from sources in that other state that are included in Washington income.
- Credit for PTET Payments: Owners can claim credits for tax expenses incurred by a pass-through entity making a PTET election. For residents, the credit is reduced by an OSTC claimed on the same Washington taxable income.
Those credits cannot be carried forward to a subsequent tax year.
Special Rules for Nonresident Individuals
Only the Washington-source income of nonresident individuals is subject to the millionaires’ tax. To determine the income that constitutes Washington-source income, S.B. 6346 provides a nuanced allocation and apportionment framework, specifying that such income generally includes:
- Wages and other compensation for services from employment rendered in Washington, including:
- Compensation attributable to professional athletics; and
- Income of a nonresident student athlete derived from the commercial use of the athlete’s name, image, or likeness.
- Income from a business, trade, profession, or occupation conducted in Washington, including the distributive share of income from a pass-through entity operating in Washington (S.B. 6346 includes a complex set of apportionment and allocation rules to determine the amount of includable income).
- Rents, short-term gains, and other amounts attributable to the ownership or disposition of any interest in real or tangible personal property in Washington.
- Income from intangible personal property, including annuities, dividends, interest, and gains from the disposition of intangible property, to the extent the property was used in a business, trade, profession, or occupation conducted in Washington.
For part-year residents, income must be allocated between Washington residency and nonresidency periods. During residency periods, individuals include total AGI, while during nonresidency periods, they include only Washington-source income.
PTET Election
As noted, S.B. 6346 introduces a PTET election, effective January 1, 2028, allowing partnerships, limited liability companies (LLCs) 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.
Takeaways
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 legislative moderation by reducing 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. While the legislation retains the higher tax rates for decedents dying on or after July 1, 2025, but before July 1, 2026, the lower rates now apply to decedents dying on or after July 1, 2026.
As the state continues to refine its tax policy, individuals with significant income, investments, and interests connected with Washington should evaluate the potential impact of those changes and consider whether proactive planning opportunities exist.
BDO Insights
Although S.B. 6346 has not yet been signed into law and could face legal challenges, it signals a meaningful shift in Washington’s tax environment for high-income individuals. Taxpayers with significant Washington income, business interests, or investment activity should begin evaluating the potential impact of the millionaires’ tax and consider whether there might be proactive planning opportunities available before the January 1, 2028, effective date.
- Constitutionality of S.B. 6346: The bill’s constitutionality 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.
- Broad Applicability: The millionaires’ tax extends beyond Washington residents and applies to part-year residents and nonresidents with Washington-source income. Thus, it could affect business owners, investors, and individuals with significant economic activities in Washington.
- $1 Million Standard Deduction: Married couples and registered domestic partners can claim a single $1 million standard deduction, not a $1 million deduction each. Individuals who are not residents of Washington for the entire year face a reduction of that $1 million standard deduction. Taxpayers with income near the threshold could benefit from planning around income recognition events, residency changes, or pass-through income allocations to help manage exposure to the millionaires’ tax.
- Domicile and Residency Planning: Individuals with significant income might want to evaluate whether changing domicile and/or residency before the bill’s effective date is appropriate. Establishing domicile/residency in another state requires substantive changes supported by objective facts, not merely a nominal change in address that can be accomplished in a short time. Given the potential tax exposure, domicile and residency determinations will likely receive heightened scrutiny from Washington tax authorities. Individuals considering relocation should ensure that changes in domicile/residency are supported by clear objective evidence, including property ownership, voter registration, driver’s license, and time spent in each state.
- Timing of Liquidity Events: The January 1, 2028, effective date provides a meaningful window to consider whether income acceleration strategies might be beneficial. For example, 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.
- Sourcing and Apportionment of Business Income: S.B. 6346 includes complex allocation and apportionment rules that apply to part-year residents and nonresidents in determining Washington-source income, which includes distributive shares from pass-through entities. Business owners should review how income is sourced and apportioned to Washington, particularly for multistate businesses for which operational changes or restructuring could affect the amount of income treated as Washington-source income.
- Business Owners and Pass-Through Entities: Owners of partnerships, LLCs classified as partnerships, and S corporations should evaluate the potential benefits of the Washington PTET election, including its interaction with the federal deduction for state taxes and other Washington tax credits.
- Trust and Estate Planning Considerations: Because the legislation includes provisions adding back income from ING trusts, individuals using trust structures should review whether existing arrangements will remain effective and whether restructuring might be appropriate.
- Modeling Projected Tax Liabilities: Individuals who are residents of Washington or have Washington-source income should model the tax impacts of their potential liabilities under the millionaires’ tax, taking into account the interaction with state modifications and available tax credits, such as the state’s capital gains credit, B&O credit, public utility credit, PTET election credit, and the OSTC.
Given the complexity of the sourcing rules, available credits, and interaction with Washington’s capital gains tax regime, early modeling and strategic planning will be critical. BDO will continue to monitor legislative developments and provide updates as guidance becomes available.
Please visit BDO’s State & Local Tax Services page for more information on how BDO can help.