The
Millionaire's Tax: 9.9% on Income Over $1 Million
The centerpiece of SB 6346 is a 9.9%
income tax on Washington taxable income exceeding $1 million per household. The
tax applies to Washington residents, part-year residents, and nonresidents with
Washington-source income, and takes effect January 1, 2028, with the first
returns and payments due in 2029.
Washington taxable income begins with
federal adjusted gross income and applies a series of state-specific
modifications. Key adjustments include:
·
A $1 million standard deduction per
household. Married couples and registered domestic partners share one $1
million deduction regardless of filing status. The deduction is indexed for
inflation beginning in 2030 (adjusted every two years). For part-year
residents, the deduction is prorated based on the ratio of Washington base
income to total federal AGI.
·
Charitable contributions are deductible up to $100,000 per
individual (or $100,000 combined for spouses or domestic partners filing
jointly or separately). Unlike the federal rules, there is no AGI percentage
limitation—contributions above $100,000 simply are not deductible for state
purposes.
·
Long-term capital gains and losses included in federal AGI are excluded
from Washington base income. However, gains already subject to Washington's
separate capital gains tax are added back, along with the associated capital
gains tax deduction. A credit is available for Washington capital gains taxes
paid, preventing double taxation on the same income.
·
State and local income taxes deducted in computing federal AGI
are added back, including taxes that generated B&O or public utility tax
credits.
·
Loss carryforwards deducted from federal AGI are added
back to the extent they are attributable to tax years ending before the law's
effective date.
·
Interest income from non-Washington state and local
government obligations is added back.
·
Pass-through entity tax (PTET)
payments are added back—owners must
add their distributive share of PTET expense deducted from federal AGI.
Nonresident
and Part-Year Resident Rules
Nonresidents are subject to the tax
only on Washington-source income, which includes wages for services performed
in Washington, business income from a Washington trade or occupation, rental
income from Washington property, and income from pass-through entities
operating in Washington. Income from intangible property is included to the
extent used in a Washington business.
There is a safe harbor for
nonresidents who perform services in-state for five or fewer days during the
calendar year (athletes are excluded from this safe harbor).
Part-year residents must allocate
income between residency and nonresidency periods—all AGI during residency, and
only Washington-source income during nonresidency.
A person is a Washington resident if
(1) domiciled in Washington during the year (unless the individual kept no
Washington home, maintained a home outside Washington all year, and was
physically present in Washington for 30 days or fewer), or (2) not domiciled in
Washington but maintained a Washington place of abode and was physically
present for more than 183 days during the year. This mirrors the residency test
under the existing Washington capital gains tax.
Pass-Through
Entity Tax Election
Effective January 1, 2028,
partnerships, LLCs classified as partnerships, and S corporations may elect to
pay the millionaire's tax at the entity level on behalf of qualifying owners.
This PTET election is designed to help Washington taxpayers maximize the
federal deductibility of their state income tax payments. Electing entities
must file annual returns and make estimated payments beginning July 1, 2029.
Owners receive credits for their share of entity-level tax paid.
Several nonrefundable credits are
available beginning with the 2028 tax year. None may be carried forward:
·
Capital gains tax credit for Washington capital gains taxes
paid on the same income.
·
B&O/public utility tax credit for taxes paid on income also
subject to the millionaire's tax.
·
Other state income tax credit (OSTC) for residents who pay income taxes
to other states on income also subject to Washington's tax.
·
PTET credit for owners' share of entity-level
tax payments.
Estimated tax payments follow the
federal framework under IRC section 6654, beginning July 1, 2029. No estimated
payments are required if the annual tax liability is less than $5,000.
SB 6346 provides meaningful
consumer-level tax relief:
·
Grooming and hygiene products,
diapers, and over-the-counter medications
become exempt from retail sales and use tax beginning January 1, 2029.
·
Repeal of sales tax on certain
services: The sales and use taxes
imposed on services under ESSB 5814 (the October 2025 sales tax expansion
covering IT services, custom software, website development, security services,
temporary staffing, and live presentations) are repealed effective January 1,
2029—except for advertising services, which remain taxable. This is a
significant reversal of the broad services tax expansion enacted just last
year.
The law delivers what supporters call
the largest small business tax cut in Washington history:
·
The B&O tax annual filing threshold
increases to $250,000 (up from $125,000), meaning businesses grossing under
that amount that owe no other taxes or fees to the Department of Revenue will
not need to file an annual B&O return.
·
The small business B&O credit is
doubled beginning January 1, 2029: for non-service businesses, the credit
increases from $55 to $110 per month (effectively exempting the first $250,000
of income); for service businesses, it rises from $160 to $320 per month.
·
The B&O surcharge on businesses with
over $250 million in Washington taxable income (the 0.5% surcharge enacted in
2025) is set to expire one year early—on January 1, 2028, instead of January 1,
2029. Additionally, beginning July 1, 2026, wholesale sales of food and food
ingredients sold by wholesalers to retailers not under common ownership are
exempt from the surcharge. Beginning January 1, 2029, licensed health care
providers, hospitals, and businesses warehousing and reselling prescription
drugs are also exempt.
Working
Families Tax Credit Expansion
SB 6346 expands the Working Families
Tax Credit, which provides a refundable cash rebate of up to $1,330 to low- and
moderate-income households. The expansion lowers the age eligibility to 18
years of age (from the current requirement of 25), effective for applications
submitted beginning in 2029.
The millionaire's tax is projected to
generate roughly $3 billion to $3.5 billion annually from an estimated 21,000
households (less than 1% of Washington's population). Revenue is dedicated to
K-12 education, health care, higher education, other essential services, the
Working Families Tax Credit expansion, and county public defense services (7%
of revenue).
Companion
Legislation: Estate Tax Rate Reduction (SB 6347)
The same legislative session produced
SB 6347, which reduces the Washington estate tax rates that were increased in
2025. For decedents dying on or after July 1, 2026, rates revert to a range of
10%–20% (down from the current range of 10%–35%), and the exemption reverts to
$3,000,000 per individual. For decedents who died between January 1, 2026, and
June 30, 2026, the exemption remains $3,076,000 as previously adjusted. A late
amendment effectively freezes the exemption at $3,000,000 going forward by referencing
a discontinued inflation index.
The law faces immediate and
formidable legal obstacles. The Citizen Action Defense Fund, led by former
Washington Attorney General Rob McKenna, announced it will file suit arguing
that the tax violates the Washington State Constitution's uniformity requirement.
The challenge relies on a 1933 Washington Supreme Court decision holding that
income is property and therefore must be taxed uniformly—making a graduated
income tax unconstitutional under existing precedent.
The Washington State Republican Party
has also announced plans to pursue both a referendum and a ballot initiative to
repeal the law. The bill includes a "necessity clause" that bars
referendums, though opponents argue the clause itself is unconstitutional given
the law does not take effect until 2028 with payments not due until 2029.
Governor Ferguson has said he expects
the legal challenges and believes the tax is constitutional, predicting that
the Washington Supreme Court will ultimately resolve the question.
|
Provision |
Effective Date |
|
General effective date of SB 6346 |
June 11, 2026 |
|
B&O surcharge exemption for wholesale food sales |
July 1, 2026 |
|
Estate tax rate reduction (SB 6347) |
July 1, 2026 |
|
Early expiration of B&O surcharge |
January 1, 2028 |
|
Millionaire's income tax begins |
January 1, 2028 |
|
WFTC age expansion effective |
January 1, 2028 |
|
First income tax returns and payments due |
2029 |
|
Sales tax exemption for hygiene products, diapers, OTC meds |
January 1, 2029 |
|
Repeal of services sales tax (except advertising) |
January 1, 2029 |
|
Small business B&O credit doubled |
January 1, 2029 |
|
B&O surcharge exemption for health care/Rx |
January 1, 2029 |
|
Estimated tax payments begin |
July 1, 2029 |
For high-income individuals with
Washington connections, whether residents, part-year residents, or nonresidents
with Washington-source income—the new tax demands immediate attention to
residency planning, income sourcing, and entity structuring. The interaction
between the new income tax, the existing capital gains tax, the PTET election,
and the available credits creates a complex planning environment that will
require careful modeling.
For small businesses, the doubled
B&O credits, increased filing threshold, early expiration of the B&O
surcharge, and repeal of the services sales tax represent genuine relief,
though the staggered effective dates mean the full benefit will phase in over
the next three years.
And for everyone involved, the
pending constitutional litigation and potential ballot measures mean that the
law's long-term survival is far from certain. Taxpayers should plan for the law
as enacted while monitoring the legal and political developments closely.
Contact the Tax Lawyers at
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)
