If you expect a large bonus, business sale, or retirement distribution in the next few years, don't wait until 2028 to think about Washington's new income tax.
As of November 4, 2026, unofficial returns show voters rejecting Initiative 645’s repeal; the tax remains scheduled for January 1, 2028, subject to final certification and any court challenge.
Under the enacted law, the tax begins January 1, 2028. The rate is 9.9% of Washington taxable income, after state adjustments and deductions. The initial standard deduction is $1 million, with spouses and state-registered domestic partners sharing one deduction even if they file separately. The statute sets the rate and start date.
There are ways to reduce the bill. Some permanently exclude income. Some move income into another year. Others require a real change in where you live or who owns the assets.
Here are ten areas I would review.
1 Use the window before 2028
Income properly recognized in 2026 or 2027 falls outside the new income tax. That makes the next two year-ends worth examining. I covered this in more detail in cliff planning for 2026 and 2027 and what to do before 2028.
A Roth conversion is one example. You generally recognize the taxable conversion amount now, while later qualified Roth withdrawals are excluded from income. For someone likely to exceed Washington's deduction in a future year, converting some traditional IRA assets before 2028 deserves a calculation. IRS Publication 590-A explains the conversion rules; see also my post on Roth conversions before 2028.
The calculation must include the federal tax cost. Accelerating income into a higher federal bracket can consume the state savings.
The same timing review can apply to compensation and a business sale, subject to the governing tax and contract rules. A 2027 closing does not necessarily put later installment payments into 2027 income. And Washington's existing capital gains tax can still apply before 2028.
2 Avoid bunching flexible income into one year
The $1 million standard deduction applies annually. An unused deduction in a lean year does not shelter income in another year.
Consider this simplified illustration. Assume a full-year Washington resident in both years, ordinary income equal to Washington base income, a $1 million deduction in each year, and no other deductions or credits. The example holds the deduction constant to isolate the timing effect.
| Income timing | First year | Second year | Total Washington income tax |
|---|---|---|---|
| Uneven income | $1,500,000 | $500,000 | $49,500 |
| Even income | $1,000,000 | $1,000,000 | $0 |
Same total income. Different state tax.
This works only where you can lawfully control recognition. You cannot simply choose a different year on your return. Compensation arrangements, accounting rules, and transaction terms determine what flexibility you actually have. Because spouses share one deduction, the marriage penalty affects this math too.
3 Use available pretax retirement contributions
Washington starts with federal adjusted gross income. Eligible pretax retirement contributions can therefore reduce income entering the state calculation.
For employees, review the available pretax portion of the workplace plan. For business owners with consistent profits, consider whether a cash-balance or other defined-benefit plan makes sense. These plans can permit larger deductible contributions than a defined-contribution plan alone, but employee coverage, funding obligations, and administration cost money. The IRS describes the tradeoffs here.
This is generally deferral. Later taxable withdrawals can enter the Washington calculation. The plan should address both the contribution years and the withdrawal years. My retirement income FAQ covers distributions.
4 Complete a planned move before the income event
A genuine move can change which income Washington may tax. Buying a house elsewhere is only part of the analysis.
Washington's resident definition includes domicile and a separate test for people domiciled elsewhere who maintain a Washington place of abode and spend more than 183 days here. Staying below 184 days does not, by itself, end Washington domicile.
Even after you become a nonresident, Washington-source income can remain taxable. And the part-year rules include special day-based allocations for pass-through items. Nonresident pass-through owners should also understand the receipts throwout rule.
If a move is already part of your plans, review domicile, residency, sourcing, and recognition dates before signing a transaction. A closing after the moving truck leaves does not settle the tax analysis. See leaving Washington, moving midyear, day tracking, and my domicile-change checklist.
5 Preserve your QSBS exclusion
For founders and investors, qualified small business stock is often the largest exclusion available.
Gain excluded under Section 1202 stays out of federal adjusted gross income. Washington generally follows that exclusion under its federal AGI starting-point rule.
The work starts well before the sale: qualifying stock, original issuance, an eligible business, the applicable holding period, and records supporting the exclusion. Merely owning stock in a small company is not enough. The federally excluded portion stays out of Washington's income-tax base under the AGI starting-point rule. Any non-excluded long-term remainder still runs through the capital-gains coordination rules — the §302 strip and conditional add-back, and the §205 credit — not a flat 9.9% on the leftover. More in does QSBS avoid the new tax?.
Review eligibility before a financing, reorganization, redemption, or sale changes the facts. My QSBS guide explains the requirements.
6 Recognize the difference between real estate gains and ordinary income
Long-term capital gains from direct (deeded) real estate sales generally remain outside Washington's capital gains tax and the new income tax. The capital gains exemption and the income-tax adjustment work together.
That makes the character of the return important. Rental income, short-term gains, and amounts treated as ordinary-income recapture do not receive the same protection.
A sale qualifying for long-term treatment can have a different result from a short-term sale. Federal taxes and Washington real estate excise tax also need to be included. This is a reason to review holding periods and sale structure, not a reason to buy a bad property. My real estate FAQ and capital gains tax vs. income tax comparison go deeper.
7 Review where your interest income comes from
U.S. Treasury interest receives protection from the state income tax. Federally tax-exempt interest on Washington state and local obligations also remains excluded.
Other states' municipal bonds are different. Washington generally adds their federally exempt interest back.
Someone holding substantial cash or bonds should compare after-tax yields, credit risk, and maturity. “Tax-exempt” on the fund name does not answer the Washington question. A fund's actual holdings and the character of its distributions matter.
8 Make planned charitable gifts efficiently
If you already intend to give, consider donating appreciated assets instead of selling them and donating the cash. Properly structured, a gift can avoid recognizing the donated appreciation while producing a charitable deduction. The federal property-gift rules govern the deduction, and gifts connected with a pending sale need review before the donor's right to the proceeds becomes fixed.
Washington's separate income-tax charitable deduction is limited to $100,000, shared by spouses and domestic partners. The recipient must satisfy Washington's qualified-organization definition, including being principally directed and managed here.
The deduction is tied to contributions claimed under federal Section 170. Federal limits, including the new floor for itemized charitable deductions, matter. A $100,000 donation does not automatically produce a $100,000 Washington deduction.
Give because you want to support the organization. Then structure the gift carefully. More on charitable giving strategies and the domicile threat to Washington charities.
9 Claim the credits that coordinate overlapping taxes
The law includes credits for qualifying B&O and public utility taxes, income taxes paid to other jurisdictions, and Washington capital gains tax. Pass-through entity tax payments can also support owner credits.
Business owners should identify the income and tax payments supporting each credit. Applicable add-backs must also be included. A deduction and a credit cannot simply be counted as two independent benefits.
For a year with a major gain, calculate the capital gains tax and the income tax, then apply the credit. Reducing one liability may leave less credit against the other. The useful number is the combined tax bill. See capital gains tax vs. income tax and my pass-through guide.
10 Evaluate completed gifts and nongrantor trusts carefully
For someone already planning to transfer wealth, a completed-gift nongrantor trust deserves examination.
The distinction matters. A grantor trust generally leaves its income taxable to the grantor. Washington also expressly adds back income from incomplete-gift nongrantor trusts.
The new tax is imposed on individuals. Read together with the incomplete-gift rule, that creates a potential planning opportunity for ordinary investment income retained by a genuine completed-gift nongrantor trust. That is an inference from the statutory structure. The trust's actual terms and operation must support the result. And completing the gift does not establish that all of the trust's income escapes Washington tax; see my post on ING trusts and anti-avoidance.
The trust remains subject to federal tax, often at compressed brackets. Distributions carrying taxable income to a Washington beneficiary can bring that income into the beneficiary's state calculation. Gift and estate taxes, retained powers, beneficiary rights, and Washington's separate capital gains tax also need review. The federal trust-tax rules are part of that analysis. See also trust planning and estate planning before 2028.
You must be willing to make the actual transfer. Moving paperwork to Nevada while retaining the same ownership and control does not accomplish it.
A separate point for pass-through business owners
Washington's elective pass-through entity tax also deserves modeling. It can potentially produce a federal deduction under IRS Notice 2020-75.
That potential federal saving does not itself reduce Washington's tax. The state election, owner credits, and deduction add-back must be modeled together. Do not assume each owner's $1 million deduction automatically reduces the entity's tax base. My pass-through guide walks through the election.
Start with the income you actually expect
Put your expected income for 2026 through 2029 on paper. Identify the source, likely recognition date, available exclusions, and anything you can still change.
Then run the federal and Washington numbers together. For a proposed sale, move, retirement contribution, or gift, do the work before the decision becomes difficult to reverse.
For the broader framework, see my guide to Washington's new income tax.
