Facing a projected budget deficit of $12 to $16 billion, Governor Bob Ferguson signed several bills into law this week which will significantly increase taxes in Washington State. An overview of the increases to Business and Occupation (B&O) tax, sales tax, electric vehicles, and luxury items can be found here. In addition, SB 5813 expands the Washington State capital gains tax, raises the Washington State estate tax exemption amount, and increases all but the lowest tier of Washington State's graduated estate tax rate structure. Read our full alert for an overview of these changes and the potential impact to taxpayers.
Attorneys in our Private Client Services Group are available to discuss how these changes might affect your estate planning.
Increase to Washington Capital Gains Tax
In 2022, Washington State implemented a capital gains tax of 7% on long-term capital gains above $250,000. Pursuant to SB 5314 and SB 5813, effective retroactively to January 1, 2025, the first $1,000,000 of an individual's capital gains remain subject to a 7% tax rate. Gains exceeding $1,000,000 are now subject to a 9.9% tax. Because this change is effective as of the beginning of this year, some individuals may have already participated in large transactions subject to the increased tax. If you are concerned this increase may impact you or you are contemplating a future transaction, please consult with a member of our Private Client Services or Tax Groups.
Increase to Washington Estate Tax Exemption and Estate Tax Rates
There is currently a $2.193 million exemption from Washington State estate tax and a graduated rate between 10% and 20% for all assets over that exemption amount. Although that exemption amount was intended to increase for inflation, the inflation adjustment in the prior law was set to an index that ceased to exist so the amount has not changed since 2018. SB 5813 imposes two primary changes to the current estate tax structure: (i) it increases the exemption amount to $3,000,000 to make up for the lack of adjustments between 2018 and 2025 and annually adjusts the amount for inflation starting in 2026; and (ii) it increases the graduated tax rates for assets above $1,000,000. These changes are effective for individuals dying on or after July 1, 2025. As a result of these changes, an additional $807,000 of a decedent's gross estate will not be subject to estate tax. However, each tax bracket of the progressive rate table for estate taxes will have a higher threshold and effective rate. For example, the lowest tax rate of 10% was previously imposed on estates between $2,193,000 and $3,193,000; but beginning July 1, 2025, the 10% tax is imposed on the value between $3,000,000 and $4,000,000.
Relatively modest increases ranging from 0% to 3% apply to taxable estates below $4,000,000. Above $4,000,000 and below $9,000,000, rate increases range from 5% to 11.5%, and the maximum rate of 20% for estates above $9,000,000 increases dramatically to 35% as illustrated in the following chart:
|
Taxable Estate |
Rate Prior to July 1, 2025 |
Rate as of July 1, 2025 |
|
$0 - $1,000,000 |
10% |
10% |
|
$1,000,000 - $2,000,000 |
14% |
15% |
|
$2,000,000 - $3,000,000 |
15% |
17% |
|
$3,000,000 - $4,000,000 |
16% |
19% |
|
$4,000,000 - $6,000,000 |
18% |
23% |
|
$6,000,000 - $7,000,000 |
19% |
26% |
|
$7,000,000 - $9,000,000 |
19.5% |
30% |
|
More than $9,000,000 |
20% |
35% |
For high-net-worth individuals, the impact of these changes is significant, especially when combined with the federal estate tax (for which there is currently a $13,990,000 exemption and maximum rate of 40%). There is still a deduction against federal estate tax for state estate taxes paid, but under this new regime the combined effective state and federal estate tax rates will increase from approximately 52% to 61%. Therefore, individuals with federally taxable estates will see an overall increase in estate taxes with a larger portion payable to the State of Washington, rather than the IRS.