Recent changes to Washington state law have introduced a new tax on high-income individuals with new considerations related to capital gains and an expanded estate tax.

Key Takeaways

While the Millionaires Tax only applies to Washington state households with income over $1 million and doesn’t take effect until 2028, it comes on the heels of increased taxes on capital gains and a second round of changes to estate tax rates. High-income residents understandably have questions.

What is the Millionaires Tax?

The new law imposes a 9.9% tax on “Washington taxable income” in excess of $1 million per household beginning in 2028. Key elements of the new rule include:

• The base amount of income subject to the tax is equal to federal Adjusted Gross Income (AGI). AGI generally includes all forms of income, including wages, investment income, income from a pass-through business, retirement benefits, etc. This amount is then adjusted as described below
• Interest income on federally tax-exempt bonds is included except for interest on bonds issued within Washington state or by the US government.
• Any state income taxes paid by a pass-through entity must also be added back to the Washinton base income.
• A deduction is allowed for charitable gifts made by the taxpayer of up to $100,000. Married couples can only claim one deduction, regardless of filing status.
• A $1 million standard deduction per household is also allowed, and again married couples can only claim one deduction, regardless of filing status. This deduction amount will be adjusted for inflation every two years beginning in 2030.
• The above two deductions create a form of marriage penalty, as two single people could receive both the $1 million standard deduction and $100,000 charitable deduction, but once they marry the household is only eligible for one of each.
• This tax also applies to non-residents of Washington who have Washington-sourced income. The $1 million exemption is adjusted to reflect the percentage of their federal AGI that is Washington-sourced.

Unlike wealth taxes being debated in other states, millionaire’s tax does not apply to the value of assets (such as the value of a resident’s home or their retirement account). It is positioned as a transactional tax on the receipt of Washington income and goes into effect January 1, 2028, with the first tax returns due in April 2029.

Taxpayers with an estimated tax liability under this new rule of $5,000 or more are required to make estimated payments during the year using the same schedule as estimated payments for federal tax purposes.

How Does the Millionaires Tax Treat Capital Gains?

The Millionaires’ Tax exists alongside Washington’s capital gains excise tax, which was originally enacted in 2021 and then expanded in 2025. Key aspects of this tax include:

• An annual standard deduction of $278,000 for 2025, which is indexed for inflation annually.
• A 7% excise tax on the first $1 million of Washington-based capital gains above the standard deduction, and a 9.9% excise tax on gains exceeding $1 million.
• Gains on the sale of real estate, livestock, timber and a qualified family owned small business are among the items exempt from the tax. Gains inside a retirement account are also exempt.

The new law includes a credit intended to mitigate double taxation where capital gains are subject to both the capital gains excise tax and the Millionaires’ Tax. However, this credit is partial and requires careful modeling in years with large liquidity-events.

What’s Happening With Estate Taxes in Washington State?

A separate bill, passed at the same time as the Millionaires Tax, rolled back aspects of an enhanced estate tax that passed in 2025. That 2025 law increased the estate tax exemption from $2,193,000 to $3,000,000. That amount was inflation adjusted at the start of 2026, but then scaled back under the new 2026 rule, leaving the following amounts in place:

More significantly, the 2026 changes rolled back the increased rates applied to taxable estates in the 2025 bill, returning them their original levels going forward. However, the 2026 bill didn’t retroactively repeal the 2025 increases, leaving a one-year period where taxable estates were subject to the higher rates.

How Can Taxpayers Plan for the New Millionaires Tax?

Legal challenges were expected upon passage of the Millionaires Tax, and at least one claiming the law violates the Washington State Constitution has been filed. But Baird recommends planning for the potential impact in 2028.

Despite the $1 million exemption, estimates suggest 20,000–30,000 households, will be subject to the tax. Additionally, those who may see unusual income spikes in 2028 should be prepared for the added cost.

Situations that could trigger the tax for otherwise lower income households could include selling a business, employer stock vesting events or diversifying a concentrated position in your investment portfolio.

To mitigate the impact of the tax, consider the following:

• Accelerating income into 2026 or 2027, before the tax takes effect.
• Deferring charitable contributions into 2028 and beyond.
• Entity selection and compensation structure.
• If you own property outside the state, consider changing your primary residence, or at least minimizing your time in Washington.

Taxpayers with an estimated tax liability of $5,000 or more under this new rule will be required to make estimated payments during the year using the same schedule as estimated payments for federal tax purposes.