Washington recently enacted a capital gains tax with the signing of SB 5096 by Gov. Jay Inslee, effective January 1, 2022. The new capital gains tax applies to individuals, including trusts with individual grantors, and is imposed on the sale of stocks, bonds, and other capital assets held for more than one year as reported for federal income tax purposes. The tax will be imposed at a 7 percent rate with the first return and payment due April 15, 2023. C corporations with capital gain income are not subject to this tax. Pass-through entities, including S corporations and partnerships, also will be exempt since capital gains are ultimately reported by individual owners and taxed at their level.
The new capital gains tax explicitly excludes sales of assets held in retirement accounts,1 livestock related to farming or ranching activities, real estate, and certain property used in a trade or business such as machinery or equipment that has been immediately expensed, among others. Deductions also are provided for the sale of qualified family-owned small business interests and for up to $100,000 in donations to qualified charitable organizations in excess of $250,000. Furthermore, an exclusion of the first $250,000 of capital gains is available to individuals, married couples filing separately, and registered domestic partners filing separately altogether. This exclusion will reduce the filing burden to only those with a tax liability. If no tax is due, no filing is required.
To prevent double taxation, taxpayers subject to the capital gains tax who also are required to report the sale under Washington’s business and occupation (B&O) tax will be allowed to take a credit against their B&O tax for the full amount of any capital gains tax owed and paid. Similarly, taxes paid to other states on capital gains, e.g., income taxes, derived from sources outside of Washington also will be given a credit equal to the amount paid.
Washington’s capital gains tax has once again sparked the debate on whether this type of tax ultimately contradicts the state’s constitution and its position on state income taxes. A case against it has already been filed by former Washington Attorney General Rob McKenna. However, a decision from the Washington Supreme Court is likely to take months.
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1 Including 401(k), IRA, Roth IRA, individual retirement annuity, defined benefit plan or defined contribution program, 403(b) tax-sheltered annuity or custodial account, or similar retirement savings vehicles.↩