Washington State Tax Update: What Recent Tax Changes Mean for You

What’s in this article:

• The Millionaire’s Tax – Now Law
• Pass-Through Entity (PTE) Considerations and SALT Planning
• Washington Estate Tax Changes (Effective 2026)
• Washington Luxury Taxes (Effective 2026)
• State and Local Employer Taxes (Evolving Area)
• Key Takeaways
• Our Approach

Washington has taken a significant step in reshaping its tax system. Governor Ferguson recently signed the Millionaire’s Tax (SB 6346) into law, marking the state’s first broad tax tied to income levels.

At the same time, with newly enacted estate tax changes and the ongoing implementation of luxury taxes and employer-side taxes, the state is creating a broader shift in how both income and wealth are taxed.

While some of these changes are not effective until 2028, others begin as early as 2026—making this an important time for planning. Below, we highlight some of the changes to be aware of:

The Millionaire’s Tax – Now Law

The new law, dubbed the “Millionaire’s Tax” imposes a 9.9% tax on household income above $1 million. In other words, it is a 9.9% tax on Washington taxable income with a standard deduction of $1 million annually. The law applies to all Washington residents (all income) and non-residents with Washington-source income, will apply to income beginning January 1, 2028, with the first payments due in 2029. In order to reduce double taxation, the law does provide credit for Washington capital gains tax paid, for taxes paid to other states, and for certain Washington business taxes, such as B&O taxes.

It’s important to understand what is and is not included in The Millionaire’s Tax, so that you can plan accordingly. The tax is based on federal adjusted gross income (AGI) with Washington-specific adjustments.

What’s included:

• Wages, bonuses, and deferred compensation
• Business and pass-through income
• Investment income, including interest and dividends, taxable capital gains
• Municipal bond income treatment remains unclear; it’s currently excluded from AGI, but may be subject to potential future state adjustments

Key Exclusions

• Real estate transactions: gains from the sale of real estate are excluded
• Qualified family-owned businesses: gains from the sale of a qualifying business may be excluded if statutory requirements are met
• Certain retirement income: distributions from retirement accounts (e.g., IRAs, 401(k)s, pensions) are excluded
• Items not included in federal AGI, such as Social Security benefits

Qualified Family-Owned Business Exclusion

One of the most significant exclusions applies to the sale of a qualified family-owned business, which may be fully excluded if requirements, including a minimum 5-year ownership period, active involvement, size and operational thresholds, and ownership concentrated within a family group, are met. This has profound planning implications, as this exclusion can result in very different tax outcomes depending on how a business is structured and operated prior to a sale.

Pass-Through Entity (PTE) Considerations and SALT Planning

Washington’s tax framework continues to interact with the federal SALT deduction limitation, creating planning opportunities for business owners. Certain entities may elect to pay tax at the entity level, which would be generally fully deductible federally and bypass the $10,000 SALT cap. Owners may receive a corresponding credit at the individual level. This is critical because the Millionaire’s Tax is based on federal AGI, so entity-level deductions may reduce individual income and potentially reduce exposure to the 9.9% Millionaire’s Tax.

Coordination rules in this area are still evolving, with the possibility of potential state add-back requirements. Also, this applies primarily to business income, not to wages or equity compensation.

Washington Estate Tax Changes (Effective 2026)

Washington also enacted changes to its estate tax system, rolling back the previous top rate of 35% and reverting to its previous maximum of 20% while retaining the $3 million exemption. The $3 million exemption amount will initially be frozen, not indexed to inflation. The new rules apply to decedents who pass on or after July 1, 2026. While the rates have decreased, Washington’s estate tax applies at relatively low thresholds compared to federal law.

Washington Luxury Taxes (Effective 2026)

Taxes on high-value assets continue to be implemented, including:

• An 8% tax on motor vehicles valued over $100,000, effective January 1, 2026
• A 5% tax on the full value of watercraft, effective July 1, 2026
• A 10% tax on aircraft was proposed, but has been repealed.

State and Local Employer Taxes (Evolving Area)

Washington is also expanding employer-side taxation, particularly at the local level. Seattle has expanded its payroll tax, with an additional tax on high compensation levels (generally over $1m); this will apply to large employers and went into effect January 1, 2026. There are also proposals at the state level to impose additional employer taxes on compensation with thresholds around $125,000, but these proposals are still in an early stage and have not yet been enacted.

These new taxes indirectly affect executive compensation structures and may influence hiring decisions, compensation design, and business location strategy.

Key Takeaways

This is a meaningful shift, but it’s important to note that the outcome is not fully settled. While the Millionaire’s Tax is now law, it’s expected to face legal challenges, as Washington has historically prohibited income taxes.

Income composition matters now more than ever, with wages and taxable investments having higher exposure while retirement income, municipal bond income, and qualifying business sales have potentially lower exposure. Business owners will have additional planning considerations with the family-owned business exclusion, the PTE election and SALT strategies, and employer tax implications.

Estate planning remains critical; even with the newly reduced rates, Washington’s estate tax applies at lower thresholds than federal law.

Our Approach

Planning should be thoughtful rather than reactive. There is a multi-year planning window as different taxes take effect; we are not recommending irreversible changes until there is greater legal and regulatory clarity. We will be actively monitoring developments and incorporating them into client planning, with a focus on identifying who is most impacted, evaluating opportunities, and providing guidance as clarity evolves.

If you have any questions or concerns or would like to discuss your personal situation, please don’t hesitate to reach out to your Coldstream Wealth Manager.

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This article is for informational and educational purposes only and does not constitute legal, tax, or financial advice. The information provided is general in nature and should not be relied upon as a basis for any specific tax planning decision.  Readers should consult with qualified legal, tax, and financial professionals regarding their specific circumstances. Coldstream Wealth Management is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training.