Alert: Washington State’s NEW Capital Gains TaxSubmitted by Kaizen Financial Advisors, LLC on August 20th, 2021
Overview of Tax
The Long-Term Services and Supports Trust Act (Trust Act) will not be the only new tax the state of Washington will be imposing on its residents come the new year. It will be joined by a new capital gains tax. Both of these new taxes become effective on January 1st, 2022.
On May 4, 2021, Governor Inslee signed Senate Bill 5096 (titled “Capital Gains Tax”) into law. In summary, starting next year, recognized capital gains over $250,000 will be subject to a 7% state tax. The revenue collected from the tax will fund the education legacy trust account and the common school construction account. This tax law is currently being legally challenged in Washington’s Supreme Court, but the state is planning to proceed so it would be prudent for Washingtonians to plan accordingly.
The $250,000 exemption is per year, per person (or per married couple, unlike federal law married couples are not allowed a higher shared amount). There is an additional deduction, not to exceed $100,000, for charitable contributions made to Washington-based nonprofits during the year. Additionally, there is limited credit available to the extent income or capital gains taxes are paid to other taxing jurisdictions.
This tax is primarily targeting gains from stocks, bonds, and other investment instruments. The tax will be assessed on long-term capital gains only, not short-term. Long-term is defined as a holding period of more than 1 year. The most notable asset not subject to the new tax is real estate. Retirement accounts are also excluded. All Washington state residents are subject to this new tax, although it is estimated that only 0.1% of the state residents will likely pay the tax in any given year. Non-residents are subject to the capital gains tax if they recognize gain on the sale of tangible assets located within the state.
Strategies to Avoiding the Washington State Capital Gains Tax
Taxpayers have several strategies to consider in anticipation of the new tax. First, consider spreading your asset sales over multiple years to keep your gains below the threshold.
The next common option is to recognize gains this tax year before the new tax is enacted. Another option is to make your charitable donations from highly appreciated assets and thus avoiding the recognition of the gain. Some individuals needing to recognize very large gains could even consider changing their state of residency. These are just a few options among many.
The appropriate strategy will largely depend on your circumstances. If you have questions regarding Washington’s new capital gains tax or any other issues impacting your financial future, don’t hesitate to reach out to your Kaizen advisor. We are here to help!