Washington's 9.9% income tax on household income above $1 million takes effect January 1, 2028. That date matters more than most people realize — because 2026 and 2027 are not just two years to wait. They are the last two years in which you can recognize income of almost any kind without owing Washington state income tax.
This is what the guide calls cliff planning: structuring your income, exits, exercises, conversions, and distributions to land as much taxable income as possible before the cliff edge of January 1, 2028. After that date, every dollar above $1 million costs an additional 9.9%.
This post breaks down the cliff planning framework — who it applies to, which income types are most moveable, how to sequence decisions across 2026 and 2027, and what the risks look like. For the full picture, see the Washington Tax Planning Guide for High Earners.
What Cliff Planning Is (and Isn't)
Cliff planning is not tax evasion and it is not aggressive sheltering. It is timing. The Washington income tax is a future liability that has a known start date. Any income you recognize before that date is not subject to the tax. Any income you recognize after is — if you are a Washington resident with AGI above $1 million.
The federal tax consequences are the same either way (in most cases). You are not creating artificial losses or deferring income into a tax shelter. You are simply accelerating the recognition of income that you would have recognized eventually, into years when the Washington rate is zero.
The logic is the same as any other tax-rate differential planning. If you knew your marginal rate was going up by 9.9 percentage points next year, you would try to recognize income now. That is exactly the situation Washington residents are in.
Who This Planning Applies To
Cliff planning is most valuable for people who have control over the timing of income recognition — founders, investors, business owners, and highly compensated executives with deferred compensation. It is less useful for W-2 employees with fixed salaries, unless they have stock options, RSUs with acceleration provisions, or deferred compensation that can be structured.
The candidates most likely to benefit include:
- Founders with a pending or near-term liquidity event (acquisition, secondary sale, or IPO)
- Angel investors or venture investors with appreciated private company stock approaching a sale
- Option holders with large spreads — both ISOs and NSOs — who have the liquidity to exercise
- Business owners considering a sale of an S corp, LLC, or partnership interest
- Executives with deferred compensation balances or retention arrangements that can be accelerated
- Roth conversion candidates with large traditional IRA or 401(k) balances
- Founders or high earners considering installment sales of real estate or other appreciated assets
If you are in one of these categories and you expect income above $1 million in 2028 or later, you should be modeling the cliff planning opportunity now.
The Income Types Most Worth Moving
Not all income is equally moveable. Some income is fixed by contract, some is controlled entirely by the taxpayer, and some is subject to negotiation with a counterparty. Here is how the main income types stack up:
NSO Exercises
Non-qualified stock option income is recognized when you exercise — the spread between exercise price and fair market value is ordinary income. You control when you exercise (subject to company restrictions and vesting schedules). For an NSO holder with a large spread, exercising in 2026 or 2027 instead of waiting produces a direct 9.9% savings on the income above $1 million. The only constraints are liquidity (you need to fund the exercise), company transfer restrictions, and blackout periods.
Roth Conversions
Converting a traditional IRA or 401(k) balance to a Roth triggers ordinary income in the year of conversion. If you convert in 2026 or 2027, that income is not subject to Washington's income tax. If you wait until 2028, it is — to the extent your total AGI exceeds $1 million. For someone with a $3 million IRA, converting before 2028 can save $198,000 or more in Washington tax, as we modeled in Roth Conversions Before 2028: The Window Is Closing.
Business Sales and Liquidity Events
If you are a founder or investor expecting a company sale or secondary in the next several years, timing matters enormously. A sale that closes in December 2027 is subject to 0% Washington income tax on the proceeds above $1 million. The same sale in January 2028 is subject to 9.9%. For exits in the $5–$50 million range, this timing difference can represent hundreds of thousands of dollars in state tax.
Founders whose companies are actively in M&A processes should be having this conversation with their lawyers and bankers now. Deal timelines slip — building in the intention to close before 2028 is worth the effort if it is achievable. That means beginning banker processes earlier, avoiding unnecessary earnout timing drift, accelerating secondary liquidity where possible, pushing diligence earlier, and cleaning up cap table issues now rather than in 2027. A transaction that feels like a “2027 close” in early 2026 can become a “2028 close” without anyone intending it.
Deferred Compensation
Executives with deferred compensation balances under Section 409A are subject to strict rules about when distributions can be made — you cannot simply elect to receive your balance early to avoid a future tax. However, if your deferred compensation plan already has a scheduled distribution that will land in 2028 or later, it may be worth exploring whether the plan terms permit acceleration (very limited under 409A) or whether other aspects of compensation timing can be managed. See Deferred Compensation and Washington's New Income Tax for the detailed analysis.
Installment Sale Reconsideration
If you currently hold an installment note from a prior sale — receiving payments over time — and the payments will continue into 2028 and beyond, you may want to model whether accelerating the remaining payments into 2027 makes sense. The math depends on the amount of gain in remaining payments, your expected AGI in each year, and the time value of the acceleration. See Installment Sales and Structured Exits for how installment treatment interacts with Washington's threshold.
The Sequencing Problem
The trap in cliff planning is accelerating too much income into a single pre-2028 year. Washington’s income tax does not apply before 2028 — but piling a large NSO exercise, a Roth conversion, and a bonus all into the same year does two things you do not want: it concentrates your federal tax exposure unnecessarily, and it wastes the other pre-2028 year’s planning headroom. The goal is not merely to accelerate income before 2028. The goal is to use the remaining pre-2028 years efficiently.
The goal is not simply to move income before 2028. The goal is to move income before 2028 in a way that keeps your AGI in each pre-2028 year at or below $1 million — or, if that is not possible, as close to $1 million as you can get.
For many founders, the planning window is shorter than it appears. Large exits take time. Residency changes take time. Option exercises require liquidity and company coordination. If a founder expects a transaction in late 2027 or 2028, waiting until 2027 to begin planning may be far too late. Mid-to-late 2026 is already planning season for anyone with a material transaction on the horizon.
This requires spreading income intelligently across 2026 and 2027 rather than stacking it. Think of 2026 and 2027 as two remaining low-rate planning years. If you have $3 million of moveable income — say, a combination of Roth conversions and NSO exercises — recognizing $1.5 million in each year lets you work with manageable federal tax brackets in both years rather than facing a single year of concentrated ordinary income. The sequencing question is which income to move first and how much per year.
Compare that to leaving all $3 million to 2028: the Washington tax on $2 million above the threshold (assuming $1 million in other income) would be $198,000.
Other income: $400K/yr
WA taxable income: $400K/yr
WA income tax: $0
($400K is below the $1M threshold)
WA taxable income: $1.4M
WA income tax: $138,600
(9.9% × $1.4M above threshold)
The Interactions to Watch
Cliff planning does not happen in isolation. Several interactions can produce unexpected results if you do not model them in advance.
The Washington Capital Gains Tax
Washington already has a tiered capital gains tax on long-term capital gains: 7% above the standard deduction ($250,000 base, indexed annually; $278,000 for tax year 2025), rising to 9.9% on gain above $1 million. If you are accelerating gains into 2026 and 2027, those gains may be subject to this capital gains tax even though they avoid the income tax. The two taxes have different bases and different thresholds, so the total state tax picture needs to be modeled for both. In some cases, the capital gains tax significantly reduces the benefit of accelerating a particular gain.
The Federal Bracket
You are not just optimizing for Washington. A large income acceleration in a single year can push you into a higher federal bracket, trigger the 3.8% net investment income tax, phase out itemized deductions, or reduce other benefits. The goal is to find the sequence that minimizes total tax — federal plus state — not just the Washington component.
AMT on ISO Exercises
Exercising incentive stock options in bulk to avoid Washington's 2028 income tax can trigger federal alternative minimum tax (AMT) if the exercise spread is large. The AMT preference for ISO exercises is 100% of the spread. This does not mean you should not exercise — the AMT credit carries forward and offsets regular tax in future years — but it does mean the federal cost of a large ISO exercise in a single year may be higher than expected. Model carefully.
The Constitutional Uncertainty
Washington's income tax is facing a constitutional challenge. The referendum effort is ongoing, and a court ruling striking down the tax — or a successful referendum repealing it — would change the analysis entirely. However, planning for a tax that is currently law is the right approach. If the tax is later repealed, the worst outcome is that you accelerated income unnecessarily — a relatively benign result compared to having failed to plan and then owing a large tax. See The Constitutional Challenge and What It Means for Planning Today for the current status.
What to Do Now
The planning window is real and it has a hard edge. Here is a practical checklist for 2026:
- Inventory your moveable income: NSO spreads, Roth conversion candidates, pending business sales, deferred compensation distributions, installment note balances, real estate gains
- Estimate your baseline AGI in 2026 and 2027 without any acceleration — salary, investment income, K-1 distributions from existing pass-throughs
- Calculate the headroom under $1 million in each year — this is the amount you can accelerate into that year with zero Washington income tax exposure
- Prioritize the income types with the highest dollar-per-unit-of-effort value: Roth conversions and NSO exercises are typically the easiest to move; business sale timing is highest-stakes but may be feasible with planning
- Model both years together — do not fill 2026 so aggressively that you have no room in 2027
- Run the federal and state tax numbers for each scenario, including capital gains tax where applicable
- Have this conversation with your CPA and attorney before the end of summer 2026 — some structures (like early option exercises with 83(b) elections) have 30-day deadlines that require advance planning
The planning opportunities available in 2026 and 2027 will not be available after the tax takes effect. Washington’s income tax does not give you a do-over. Income you leave in 2028 and beyond will be taxed at 9.9% above the threshold — for as long as you remain a Washington resident and the law is in effect. The window is real and it has a hard edge.
Related Posts
- Roth Conversions Before 2028: The Window Is Closing for Washington Residents
- Stock Option Exercise Timing: Planning Before Washington's 2028 Income Tax
- Installment Sales and Structured Exits
- Deferred Compensation and Washington's New 9.9% Income Tax
- Trust Planning for Washington High Earners: ING, NING, and DING Trusts
- Washington's 9.9% Income Tax: What High Earners Must Do Before 2028
This post is for informational purposes only and does not constitute legal or tax advice. Consult with a qualified tax professional regarding your specific circumstances.
