Washington's 9.9% Income Tax: What High Earners Must Do Before 2028

Washington's 9.9% income tax is now law. Governor Ferguson signed ESSB 6346 on March 28, 2026. The tax applies to household income above $1 million and takes effect January 1, 2028 — giving high earners, founders, and investors roughly two years to act. This guide covers the mechanics of the tax and the most powerful strategies to reduce your exposure before the clock runs out.

For background on the tax itself, see Washington's New Income Tax: What Founders, Investors, Athletes, and High Earners Need to Know. For legal challenge details, see The Washington Income Tax Legal Challenge: What to Expect and When.

This post is part of our Complete Guide to Washington's New Income Tax.

The bifurcated landscape

Washington's new system creates a striking bifurcation: punishing rates on earned income running alongside a near-zero-tax path for qualifying equity.

A physician or tech executive earning $3 million will face a combined federal and state effective rate exceeding 40%. Meanwhile, a founder selling a startup for $15 million could potentially owe zero in both federal and state taxes — through the Qualified Small Business Stock (QSBS) exclusion, which remains fully protected under ESSB 6346. In this new era, understanding which "bucket" your income falls into is the entire game.

The $1 million threshold is not a graduated bracket — it is a cliff. Cross it, and the full 9.9% applies to every dollar above that deduction. Washington is also introducing what may be the largest marriage penalty in the country: the $1 million standard deduction applies per household, not per spouse. For a dual-income household where each spouse earns $1 million, the penalty for being married is $99,000 in additional state tax that two single filers would not owe. See The Marriage Penalty Explained for the full analysis.

How the Washington income tax works

The new tax begins with your federal adjusted gross income (AGI). From that number, Washington makes several adjustments. Long-term capital gains already subject to the state capital gains tax are added back, while gains on qualified family-owned small businesses and sales of residential real property are exempt. Interest from most state and local bonds, state and local income taxes deducted at the federal level, and certain loss carryforwards are also added back. After these adjustments you subtract a $1 million standard deduction per household (indexed for inflation), pro-rated for part-year residents.

For residents, the tax applies to all income; nonresidents pay only on Washington-source income, including wages earned in Washington, income from businesses operated here and gains from real or tangible property located in the state. Married couples and registered domestic partners share the single $1 million deduction. Estimated tax payments begin July 1, 2029, following federal quarterly payment rules.

What income is exposed (and what isn't)

Income included in the Washington tax base includes wages, bonuses, business income, partnership and S-corporation income, rental income, investment income, and gains from intangible property to the extent used in a Washington business. Several exemptions and credits reduce exposure:

• Qualified family-owned small business sales: Gains from the sale of a small business with less than $10 million in annual revenue and at least 30% ownership by the seller are exempt.
• Residential real property: Sales of personal residences are excluded.
• Certain retirement income: The bill specifically overrides prior pension exemptions. Taxpayers should not assume retirement payments fall outside the tax base without reviewing the statute closely. Tribal treaty income is a separate issue and should be evaluated independently.
• Charitable contributions: Up to $100,000 per individual ($100,000 total for couples) are deductible.
• Credits: Taxes paid under Washington's capital-gains tax, the B&O/public utility tax and other state income taxes can offset the millionaires' tax. Business owners can also claim a credit for pass-through entity tax (PTET) paid at the entity level.

Incomplete nongrantor (ING) trusts are not a workaround; Section 307 of the bill appears to add back income from INGs to prevent avoidance.

The biggest planning levers

Because the tax starts with federal AGI, the most powerful planning strategies occur at the federal level. Here are the five primary levers, each worth evaluating with a qualified advisor before 2028.

1. Section 1202 and QSBS

Qualified small business stock (QSBS) can provide up to 100% exclusion from federal capital gains tax. Because Section 1202 gains are excluded from federal AGI, they are also not included in the Washington tax base. The sale of qualifying QSBS can therefore eliminate both federal and state tax if held five years and other requirements are met. Founders should confirm QSBS eligibility early and avoid disqualifying actions. See our full QSBS guide for eligibility details.

2. Income timing before 2028

Since the tax applies only to income earned on or after January 1, 2028, accelerating bonuses, stock-option exercises, and liquidity events into 2026–2027 can shield income from the 9.9% levy. Conversely, delaying deductions — such as large charitable donations — into 2028 may maximize their benefit once the higher rate applies. The planning window is genuinely short; act before year-end 2027.

3. AGI reduction strategies

The most powerful AGI reduction tool for many high earners is a cash-balance or defined-benefit plan. Unlike a 401(k), which caps contributions at $23,500 (plus $7,500 catch-up), a well-designed DB or cash-balance plan can shelter $100,000 to $300,000 or more per year — fully deductible and directly reducing Washington taxable income. Business owners, physicians, and partners with consistent high income should evaluate these plans with an actuary. Deferred compensation arrangements offer another route. HSA contributions ($4,300 individual / $8,550 family for 2026) are triple-tax-advantaged. Bunching charitable contributions into donor-advised funds (up to the $100,000 cap) can further lower the taxable base.

4. Pass-through entity tax election (PTE)

SB 6346 allows partnerships, LLCs, and S-corporations to elect to pay the 9.9% tax at the entity level, with owners receiving a credit for the tax paid. Because entity-level taxes are deductible for federal purposes, the PTE election can reduce the effective state tax rate from 9.9% to around 6.2% for those in the 37% federal bracket. Business owners should model the election annually.

5. Domicile and residency planning

Changing domicile to another state (e.g., Florida or Texas) before 2028 can avoid the tax entirely, but the Washington Department of Revenue aggressively audits domicile changes. To survive scrutiny, a move must include severing ties with Washington: selling or leasing your principal residence, moving family and personal property, obtaining out-of-state licenses and registrations, and spending fewer than 31 days per year in Washington. See our guide: How to Change Your Washington Domicile to Avoid the Income Tax.

Real examples

To understand the impact, consider the following simplified examples. Household AGI over $1 million is taxed at 9.9%.

For dual-income couples, the $1 million deduction is shared, so two earners each making $600,000 would jointly owe tax on $200,000 of income. Part-year residents pro-rate the deduction based on Washington-source income.

Impact of planning strategies (household AGI: $2M)

Common mistakes

• Assuming existing retirement accounts solve the problem. Maxing out a 401(k) reduces income by only $23,000–$30,000 per year. High earners need bigger levers (cash‑balance plans, deferred compensation, QSBS).
• Confusing capital‑gains and income taxes. Washington’s capital‑gains tax (7 % on gains above $250 000) continues to apply; SB 6346 provides a credit for capital‑gains tax paid. Gains above $1 million are taxed at 9.9 % effective January 1 2028, separate from the income tax starting in 2028.
• Underestimating the $1 million threshold. The deduction is per household and indexes with inflation only after 2029. A business sale or bonus can push you over the threshold.
• Poor domicile planning. Simply renting an apartment in another state while retaining a Washington home will not succeed. Domicile planning requires clear facts and documentation.

What happens next

Governor Ferguson signed SB 6346 into law on March 28, 2026. The tax takes effect January 1, 2028, with first estimated payments due July 1, 2029. Legal challenges are expected — the Washington Constitution has historically barred income taxes — and a repeal initiative may appear on the November 2026 ballot. The bill's authors wrote in a "necessary for state government" clause in an attempt to bar a referendum. High earners should plan under the assumption that the tax will survive litigation, while monitoring developments.

Key dates

Next steps

The planning window is short. 2026 and 2027 are the years when founders, investors, and high-income professionals can act — whether by accelerating income, qualifying for QSBS, electing the PTE, or moving. To dive deeper into the specific rules, timelines, and planning checklists, get the Washington State Tax Planning Guide for High Earners (58 pages, $49.99 — QSBS strategies, the marriage penalty, domicile planning, PTE elections, worked examples for founders, physicians, and executives). If you need help applying these strategies to your specific situation, book a consultation with Joe Wallin.

New Guide — 58 Pages

Washington State Tax Planning Guide for High Earners

QSBS strategies, the marriage penalty, domicile planning, PTE elections, worked examples for founders, physicians & executives — everything you need before 2028.

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The Washington State Tax Planning Guide ($49.99)

For readers who want to go deeper, I've published a comprehensive Washington State Tax Planning Guide for High Earners — 84 pages of practical planning guidance with worked examples, checklists, and a domicile audit template.

The guide covers QSBS strategies and holding period mechanics, the marriage penalty with community property implications, PTE election modeling, domicile change planning with an audit-ready documentation checklist, and worked examples for founders, physicians, and executives at various income levels. It is designed to be used alongside your CPA and tax advisor — not as a replacement.

The guide does not cover federal tax planning beyond the SALT interaction, California departure audits, or estate planning strategies (which are covered in our separate estate planning post). It is focused entirely on Washington's new tax and the specific planning levers available before 2028.

Instant download. Free updates through 2028.

Further Reading

→ How Washington's 9.9% Tax Applies to Stock Options and RSUs

→ Remote Workers: Who Owes What?

→ Pass-Through Business Income: S-Corps, LLCs, and Partnerships

→ Washington vs. California: A Tax Comparison

Dive deeper into specific topics covered in this guide:

→ The 30-Day Rule for Washington Income Tax Residency

→ How to Change Your Washington Domicile to Avoid the Income Tax

→ The Washington Income Tax Legal Challenge: What to Expect

→ When Would the First Income Tax Payment Be Due?

→ QSBS and Washington's New Millionaire Tax

→ Washington's Income Tax for Professional Athletes

→ Why State Income Taxes Almost Always Raise Less Than Promised

→ Will Washington's Millionaire Tax Survive a Court Challenge?

Related Posts

• Washington vs. California: A Tax Comparison for Founders and Investors
• QSBS Stacking: How to Multiply the $15M Exclusion with Trusts and Family Gifts
• Washington's New Income Tax: What Founders, Investors, Athletes, and High Earners Need to Know
• How to Change Your Washington Domicile to Avoid the Income Tax
• Stock Option Exercise Timing: Planning Before Washington's 2028 Income Tax
• Washington's New Income Tax: The Complete Guide