Note: This checklist was prepared to address the Washington capital gains tax, effective January 1, 2022, for those taxpayers interested in changing their domicile from Washington. However, many of the same factual issues are considered by other states when assessing whether a particular taxpayer has abandoned one domicile and/or established a new domicile.
General Rule:
Washington does not have an income tax, but the legislature enacted a capital gains tax effective January 1, 2022. Though challenged as an unconstitutional income tax pursuant to Washington's state constitution, the tax was upheld in Quinn v. State, 526 P.3d 1 (2023). Washington's new tax applies a 7% tax on a Washington resident's adjusted long-term capital gains. The tax only applies to individuals and those who are treated as "beneficial owners" of long-term capital assets held by a pass-through or other disregarded entity to the extent of the individual's ownership in the entity. It also only applies to gains allocated to Washington state.
Whether or not Washington's capital gains tax applies and how it applies depends on whether the taxpayer is a resident or domiciliary of Washington. For purposes of the tax, one is considered a "resident" if:
- They are domiciled in Washington during the taxable year unless
they:
- Maintained NO permanent place of abode in the state during the ENTIRE taxable year; and
- Spent no more than 30 days of the taxable year in Washington.
- They were not domiciled in Washington during the taxable year, but maintained a place of abode and were physically present more than 183 days during the taxable year.
With respect to gains from the sale of tangible personal property, if the property is moved out of Washington at least two years prior to the sale of the property, the gains will not be allocated to Washington. In this case, the two years include the current taxable year and the immediately preceding taxable year. Long-term capital gains derived from intangible personal property are allocated to Washington if the taxpayer was domiciled in Washington at the time the sale or exchange occurred.
Whether or not a taxpayer is domiciled in Washington is based on facts and circumstances. While the statute does not provide a definition of domicile or domiciliary, the Department published a proposed rule that provides further guidance. The proposed rule states that "domicile" means:
[A] Permanent place of abode, coupled with the intent to make the abode one's home. It is the place that you intend to return to even if you visit or temporarily reside elsewhere. Thus, actual presence in a location at any given time is not necessarily determinative of a person's domicile. An individual can have only one domicile at a time. A Washington domiciliary who intends to move at a future date is still considered domiciled in Washington.
The Department also provides a nonexclusive list of factors the Department will consider in evaluating an individual's domicile:
- Length of time spent in a location;
- Expressed intent;
- Place of business, profession, or employment;
- Location of bank accounts;
- Residence and address for federal income and state tax purposes;
- Sites of personal and real property owned by the individual;
- State of motor vehicle and other personal property registration;
- State of motor vehicle driver's license;
- Location of schools attended by children;
- State of voter registration;
- Location of professional or business licenses;
- Payment of in-state tuition;
- Location from where financial transactions originate;
- Claiming of residence in a state for purposes of obtaining a hunting or fishing license, eligibility to hold public office, eligibility for obtaining a property tax benefit, or for judicial actions; and
- Mailing address.
There are certain presumptions within the rule as well. If a taxpayer is a Washington domiciliary at any time during a particular year, the Department presumes the taxpayer was a Washington domiciliary at the time any personal property was sold or exchanged during the same year. Additionally, the Department presumes that the domicile of spouses or domestic partners is the same. Similarly, the Department also presumes that a child's domicile is the same as the domicile of the child's parents until the child is no longer dependent.
The key to an easy/favorable resolution in allocating long-term gains from intangible property is clear and convincing evidence that you have abandoned your Washington domicile with the burden on the party asserting the change, which is usually the taxpayer. To change domicile, a taxpayer not only needs to leave Washington but also must establish a new domicile. Completing this checklist and maintaining (in readily accessible files) evidence of all actions taken, including printouts of computer pages and emails, can help with both the assessment of the taxpayer's domicile and carrying the burden of proof if there is a dispute with the tax authorities.
This checklist is not dispositive if the tax authorities dispute the taxpayer's domicile. The checklist provides an incomplete list of objective facts that support the taxpayer's argument that they have severed connections with the state of Washington and created a new domicile in a different state.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.