Last updated: May 13, 2026
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 imposes a capital gains excise tax on certain long-term capital gains, has enacted a new individual income tax scheduled to take effect on January 1, 2028, and is already facing a constitutional challenge to that new tax. For most Washingtonians, day-to-day taxes haven't shifted. But if you're a founder approaching a liquidity event, an investor with concentrated stock, or a high earner anywhere near the new thresholds, Washington is now a state with real income-tax planning to do.
This guide answers the questions you're actually asking: Does Washington have a state income tax? What's the rate? When does it apply? And what should you be doing about it?
Current status
ESSB 6346 has been enacted and is scheduled to apply beginning January 1, 2028. A referendum challenge to the new tax has been rejected by the Washington Supreme Court, which held 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 in Klickitat County Superior Court remains pending. 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.
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?
The short answer is: not on a broad current basis, but Washington now has a capital gains excise tax in force and a separate individual income tax enacted for 2028. Washington historically did not impose a broad personal income tax on wages, and for most residents that's still functionally true.
First, a capital gains tax on long-term gains above an annual deduction, enacted in 2021 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 has been adjusted for inflation and is now $278,000 for tax year 2025. The figure is indexed annually — check the Washington Department of Revenue for the current year's number before relying on it. (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.
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 was filed in Klickitat County Superior Court on April 9, 2026, raising the Washington Constitution's uniformity clause — 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.
Frequently asked questions
Does Washington have a state income tax? Washington has enacted one, but it is not scheduled to take effect until January 1, 2028; today, Washington has a capital gains excise tax and no broad current individual income tax.
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) 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 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.
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, email Joe Wallin at wallin@carneylaw.com.
