Does Washington Have a State Income Tax? Not Yet — 9.9% Arrives in 2028

This post is part of our Complete Guide to Washington's Capital Gains Tax.

Last updated: June 14, 2026

Washington does not currently impose a broad personal income tax on wages. A new 9.9% individual income tax on Washington taxable income above a $1 million household standard deduction takes effect January 1, 2028.

For decades, "Washington has no income tax" was a defining feature of building a company or accumulating wealth in this state. Founders moved here for it. Investors structured around it. Retirees relocated for it.

That story has changed.

Washington now has a capital gains excise tax, a new 9.9% individual income tax taking effect January 1, 2028, and an active constitutional challenge to that new tax. For most Washingtonians, nothing has changed yet. But if you're a founder near a liquidity event, an investor with concentrated stock, or a high earner approaching the $1M threshold, the planning decisions you make in 2026 and 2027 matter more than they ever have.

This guide covers the current state of Washington taxes, what changes in 2028, how it compares to other states, and — most importantly — what you should be doing about it before the window closes.

This article is general information, not legal or tax advice. Consult a qualified attorney or tax advisor about your specific situation.

Current status

ESSB 6346 (Laws of 2026) has been enacted and is scheduled to apply beginning January 1, 2028. On May 14, 2026, a unanimous Washington Supreme Court rejected the referendum challenge, holding that the bill falls within the "support of state government" exception to the referendum power; the Court expressly did not decide the constitutionality of the tax. A separate constitutional challenge filed by the Citizen Action Defense Fund (CADF) — with former Attorney General Rob McKenna and former Washington Supreme Court Justice Phil Talmadge on the briefs — is now the only path to stopping the tax before it takes effect. Public records obtained from the Attorney General's Office suggest the legislation was deliberately drafted as a test case for revisiting Culliton v. Chase, 174 Wn. 363, 25 P.2d 81 (1933) — the decision holding that income is “property” subject to the uniformity clause, which has anchored Washington's prohibition on a graduated income tax for nine decades. Taxpayers should plan as if the law takes effect on January 1, 2028, unless and until a court, initiative, or later legislation changes the result.

What happens if the constitutional challenge succeeds?

If the Klickitat County Superior Court — or ultimately the Washington Supreme Court — strikes down the new income tax, ESSB 6346 would be invalidated before it ever collects a dollar. That would return Washington to its pre-2026 position: a capital gains excise tax in force, but no broad individual income tax. Historically, the Washington Constitution's uniformity clause (Article VII, §§ 1–2) has blocked graduated income taxes since Culliton v. Chase, 174 Wn. 363, 25 P.2d 81 (1933), and the new challenge squarely targets that doctrine. If you are doing planning that depends on the 2028 effective date being stopped, you are making a bet on litigation — courts have surprised before, and the legislature could re-enact a revised version even if the current law is struck down. The prudent posture is to plan as if the tax takes effect, while staying current on the litigation.

Quick answers

• Washington does not currently tax wages generally.
• Washington does tax certain long-term capital gains.
• The capital gains tax is 7% on the first $1 million of taxable Washington capital gains above the annual deduction, and 9.9% on amounts above $1 million.
• A new 9.9% individual income tax is scheduled to begin January 1, 2028.
• The new income tax applies only to Washington taxable income above the $1 million standard deduction.
• QSBS gain excluded federally under IRC §1202 is generally excluded from Washington's capital gains tax.

Does Washington have a state income tax?

Not today — and not until January 1, 2028. Washington has no broad personal income tax in 2026. What it has is two narrower regimes that matter enormously if you’re near the thresholds: a capital gains excise tax in force since 2022, and a 9.9% income tax on household income above $1 million enacted by ESSB 6346, scheduled for 2028 and under constitutional challenge.

First, a capital gains tax on long-term gains above an annual deduction, enacted in 2021, effective for sales on or after January 1, 2022, and upheld by the Washington Supreme Court in 2023. Second, a new individual income tax on very high incomes, scheduled to take effect on January 1, 2028, with first payments due in 2029.

If your income and gains stay below those thresholds, you generally will owe no Washington capital gains tax and, under current law, no Washington individual income tax. If you cross them — and many founders do in the year of a liquidity event — the rules now matter to you.

Washington's capital gains tax

This is the piece that's already in effect and already collecting revenue. Here's what you need to know.

Rate. The tax is tiered. The first $1 million of long-term capital gain above the annual deduction is taxed at 7%. Gain above that $1 million is taxed at 9.9%. See the Washington Department of Revenue capital gains tax page for the official rate schedule.

Annual deduction. The original $250,000 standard deduction is adjusted for inflation annually and is $278,000 for tax year 2025 (up from $270,000 in 2024). The Washington Department of Revenue had not published the 2026 figure as of June 2026; expect a modest inflation increase above $278,000 once it does. (See Washington DOR.)

What's taxed. Long-term capital gains on the sale of stocks, bonds, business interests, and other capital assets allocated to Washington.

What's excluded. Real estate, assets held in retirement accounts, certain qualified family-owned small business sales, livestock used in farming, timber, and others.

QSBS interaction. This is the part founders most often get wrong in other states — but Washington gets it right. Washington generally respects the federal Section 1202 exclusion for capital gains tax purposes, so qualified small business stock gain that is excluded federally is also excluded from Washington's capital gains tax. That makes Washington more favorable on this point than states like California, which tax capital gains as ordinary income. See our complete guide to QSBS and Section 1202 for the federal mechanics. The Washington Department of Revenue likewise confirms that Washington's capital gains tax does not apply to QSBS gain excluded from federal net long-term capital gain under IRC §1202. (See Washington DOR.)

Filing. Returns are filed with the Washington Department of Revenue, due alongside your federal return.

The new Washington income tax (effective January 1, 2028)

In addition to the capital gains tax, Washington has enacted a new individual income tax that reaches Washington taxable income above a very high threshold. It is widely described as a "millionaire's tax," and it takes effect on January 1, 2028. First payments are not due until 2029. The statute also amends RCW 1.90.100 (Initiative 2111) to provide that the personal-income-tax prohibition does not apply to the new tax so long as the household standard deduction remains at least $1 million.

Key dates at a glance:

2026–2027 — Planning window. Income and liquidity events that close before the effective date fall outside the new tax.

January 1, 2028 — Effective date. The 9.9% tax applies to household income above the $1M standard deduction.

2029 — First payments due (first estimated payments July 1, 2029).

Ongoing — Litigation track. The constitutional challenge in Klickitat County could alter or stop the tax before 2028.

Who pays. Individuals whose Washington taxable income exceeds the standard deduction. The tax applies to individuals, not entities.

Standard deduction. $1 million. Critically, married couples and registered domestic partners share a single $1 million deduction regardless of whether they file jointly or separately. There is no marriage doubling. Concretely: a married couple with $1.5 million of combined Washington taxable income owes 9.9% on $500,000 — about $49,500 — not on the $0 they would owe if the deduction doubled. The trap is biggest for two-earner households and for couples planning a joint liquidity event.

Rate. A flat 9.9% on Washington taxable income above the $1 million standard deduction. (Yes, this happens to be the same 9.9% that applies to capital gains above $1 million under the existing capital gains tax. The two rates are statutorily distinct — one is the top tier of the excise tax on long-term capital gains, the other is the new individual income tax on ordinary income — they simply align numerically.)

Income base. The tax uses federal adjusted gross income as the starting point, with Washington-specific additions and subtractions. The statute does not create a general retirement-income exclusion, so IRA distributions, pension payments, and similar items included in federal AGI can count toward the $1 million threshold.

Pass-through entity election. Although the tax is imposed on individuals, the new statute permits an elective entity-level tax for pass-through entities, including S corporations and LLCs taxed as partnerships. Founders considering this should review the statute and talk to their tax advisor before making the election.

Trusts. The new 9.9% income tax applies to individuals, not entities. The treatment of trusts — including non-grantor trusts used in high-net-worth planning — remains important, but the enacted statute already contains specific rules for certain incomplete-gift nongrantor trusts; confirm with counsel before relying on a trust strategy. See our trust planning guide for the broader framework.

Constitutional challenge. A constitutional challenge to the new income tax (Citizen Action Defense Fund v. State of Washington) was filed in Klickitat County Superior Court on April 9, 2026, raising the Washington Constitution's uniformity clause (Article VII, §§ 1–2) — historically the doctrinal barrier to a state income tax in Washington. The litigation is at an early stage, and the outcome will determine whether the 2028 effective date survives judicial review.

Washington vs. other states

Even with the new regime, Washington's state personal-income-tax burden is lighter than California's or Oregon's for taxpayers below the 2028 threshold — the new tax only bites at the top. But for founders selling a company, the gap between Washington and a true zero-tax state like Nevada or Florida has widened, and residency planning conversations are happening that wouldn't have happened five years ago.

California's top marginal individual income tax rate reaches 13.3%, and California taxes capital gains as ordinary income. Oregon's top marginal individual income tax rate reaches 9.9%, although Oregon uses graduated brackets and has some special reduced-rate regimes. Critically, Oregon's 9.9% top bracket kicks in at roughly $125,000 of taxable income for single filers (and around $250,000 for joint filers), whereas Washington's 9.9% rate does not apply until income exceeds the $1 million standard deduction. So while the top rates are nominally identical, Washington is meaningfully lighter than Oregon across most of the high-earner range. Nevada, Texas, Florida, and Wyoming do not impose a state personal income tax, so they also do not impose a separate state tax on individual capital gains. Washington now sits in the middle: no broad wage tax for most residents, but a real capital gains regime and — unlike California — continued conformity to the federal Section 1202 exclusion for QSBS.

For deeper comparisons, see our Washington vs. California tax comparison for founders and investors and our Washington vs. Oregon vs. Nevada comparison.

What this means if you're a founder

If you're building a startup in Washington, the new tax regime changes several planning conversations.

Pre-liquidity planning matters more than ever. The structure and timing of your exit now has a Washington tax consequence layered on top of the federal consequence. Decisions you make 12 to 24 months before a sale — entity structure, holding periods, trust planning, residency — drive the outcome.

QSBS still works in Washington. Because Washington conforms to federal Section 1202, qualified small business stock gain excluded at the federal level is also excluded from Washington's capital gains tax. This is a real advantage over California and other non-conforming states.

Entity choice has shifted. The relative attractiveness of C-corp, S-corp, and LLC structures looks different when Washington's 9.9% income tax can reach pass-through income above the $1 million threshold — and when the PTE election creates a new lever for partnership-taxed entities. We walk through the analysis in C-Corp vs. S-Corp vs. LLC: Washington Income Tax.

Section 1045 rollovers may be more valuable. As a statutory matter, deferring gain into replacement QSBS should generally defer both federal tax and Washington capital gains tax, although published Washington guidance on that point remains limited. See our guide to Section 1045 rollovers.

Stock option exercise timing has a state dimension. Whether and when to exercise, and whether to file an 83(b) election, can now have Washington tax consequences as well as federal ones. See When to Exercise Stock Options and our 83(b) election guide.

What this means for retirees and high-net-worth individuals

If you're not a founder but you live in Washington with significant assets or retirement income, the analysis is different.

Retirement income. Because the new 9.9% income tax uses federal AGI as its starting point, retirement distributions that appear in federal AGI — traditional IRA withdrawals, 401(k) distributions, taxable pension payments — count toward the $1 million threshold. For most retirees this is moot because their AGI is well below $1 million. For high-net-worth retirees with significant required minimum distributions, the math now matters. See our detailed analysis in Is Retirement Income Subject to Washington's Income Tax? Two important wrinkles for retirees doing this math: Roth IRA and Roth 401(k) qualified distributions are not in federal AGI, so they do not count toward the $1 million threshold, which makes Roth conversions a more interesting Washington planning tool. Social Security benefits are only partially included in AGI (at most 85%), so a retiree whose taxable income consists largely of Social Security is unlikely to approach the threshold even at relatively high benefit levels.

Trust planning. DING trusts, NING trusts, and similar structures are back in the conversation, but Washington's enacted rules specifically address certain incomplete-gift nongrantor trust arrangements. Whether they work for Washington purposes depends on how DOR and courts will interpret and apply the enacted rules. See Trust Planning for Washington Income Tax. As a rough signal: arrangements that were structured solely to shift a Washington resident's ordinary income to an out-of-state nongrantor trust are the most exposed under the new anti-avoidance language, while long-standing dynasty and credit-shelter trusts established for non-tax reasons are generally outside it. Anything in between — particularly newly formed DING/NING structures funded in contemplation of the 2028 effective date — deserves a fresh look with counsel rather than reliance on pre-2026 planning memos.

Residency planning. Some high-net-worth Washingtonians are evaluating relocation to a true zero-tax state in advance of a sale or distribution event. The mechanics of changing domicile — and surviving a residency audit — are not casual.

Planning Levers for High Earners (2026–2027)

The 2026 planning window is the most important period for high earners. Income earned and events that close before January 1, 2028 are not subject to the tax. That means 2026 and 2027 are your years to act — accelerate income, time liquidity events, qualify QSBS, and evaluate domicile changes before the clock runs out. The five levers below are each worth evaluating with a qualified advisor.

This article is general information, not tax or legal advice, and does not create an attorney-client relationship. The figures and savings estimates shown are illustrative and depend on facts specific to your situation. Consult a qualified tax advisor or attorney before acting.

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. Also see: QSBS & Washington Taxes: A Start Here Guide

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 can further lower the taxable base.

4. Pass-through entity tax election (PTE)

ESSB 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 minimizing the time you spend in Washington — well under the 183-day mark, and as few days as you can document. 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)

Ready to run the numbers on your specific situation? Book a free 20-minute call with Joe Wallin to talk through QSBS, income timing, PTE elections, or domicile planning before 2028.

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 $278,000 for 2025, adjusted annually for inflation) continues to apply; ESSB 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.

Frequently asked questions

Does Washington have a state income tax? Not in 2026. Washington has enacted a 9.9% income tax (ESSB 6346), but it is not scheduled to take effect until January 1, 2028. Today, Washington has a capital gains excise tax and no broad personal income tax on wages.

What is Washington's income tax rate? The capital gains tax is tiered: 7% on the first $1 million of gain above the deduction, and 9.9% on gain above that. The new individual income tax effective in 2028 is a flat 9.9% on income above the $1 million standard deduction.

When does Washington's new income tax take effect? January 1, 2028, with first payments due in 2029. The effective date is subject to pending constitutional litigation in Klickitat County Superior Court.

Does Washington tax capital gains? Yes. Long-term capital gains above the annual deduction ($278,000 for tax year 2025; the 2026 figure was not yet published as of June 2026) are taxed at 7% on the first $1 million and 9.9% above that. Real estate, retirement accounts, and certain other categories are excluded.

Does Washington tax retirement income? Beginning in 2028, the new 9.9% income tax uses federal AGI as its starting point with no special carve-out for retirement income, so taxable retirement distributions count toward the $1 million threshold. Most retirees will fall well below the threshold and owe nothing.

Is QSBS exempt from Washington's capital gains tax? Yes. Washington follows federal Section 1202 treatment, so qualified small business stock gain excluded federally is also excluded from Washington's capital gains tax.

Can a pass-through entity make a state-level election? Yes. The new statute permits a PTE election for S-corporations and LLCs taxed as partnerships, allowing the tax to be paid at the entity level. Review the statute and consult a tax advisor before making the election.

How does Washington's tax regime compare to California? Washington is still significantly better for most earners. California has a top marginal individual income tax rate of 13.3% and treats capital gains as ordinary income; Washington taxes only capital gains and, beginning in 2028, ordinary income above $1 million. See our full comparison.

Will the new Washington income tax survive judicial review? That remains an open question. The Washington Constitution's uniformity clause (Article VII, §§ 1–2) has historically been the barrier to a state income tax, and the new statute is being challenged on that ground in Klickitat County Superior Court. The litigation is at an early stage.

What is the Washington capital gains tax standard deduction for 2026? Washington had not published the 2026 standard deduction as of June 2026. The 2025 deduction is $278,000 (up from $270,000 in 2024), and the 2026 figure will be inflation-adjusted above $278,000 once the Department of Revenue releases it. Married couples and domestic partners share one combined deduction, not one each.

What is the Washington capital gains tax rate and threshold in 2026? Long-term capital gains above the standard deduction are taxed at 7% on the first $1 million of gain and 9.9% on gain above $1 million. The $1 million tier threshold is not indexed for inflation, so more gain falls into the 9.9% tier over time.

Bottom line

"Washington has no income tax" is no longer the full story. For the average resident, day-to-day taxes haven't changed. But for founders approaching an exit, investors with concentrated positions, and high earners crossing the new thresholds, Washington is now a state with real income-tax planning to do — and the planning starts well before the liquidity event, not after.

If you'd like to talk through how the new regime affects your specific situation, book a 20-minute call with Joe Wallin or email wallin@carneylaw.com.