December 12, 2022

The Latest on the Washington State Capital Gains Tax (Retroactive to 1/1/22)

In Tax Planning, Wealth Strategy

Glen White
Contributions from: Glen White

The Washington Capital Gains Tax drama continues. Earlier this year the Douglas County Superior Court held the tax unconstitutional, and the State of WA appealed to the Supreme Court. While the Supreme Court will hear arguments next month, the State of WA asked for, and received, a stay on the Superior Court’s decision. So, until the Supreme Court decides the case, which won’t be until well into 2023, the capital gains tax is collectible.

Our advice to Washington taxpayers wondering if they need to worry about the state cap gain tax for 2022 is first to remember there is a $250,000 threshold; nothing is due on the first $250,000 of gain. For those with gain above that, keep funds available since they may need to pay the tax by April 15 to avoid penalties should the Supreme Court overturn the tax, or apply for a refund should the Supreme Court uphold the Superior Court’s ruling.

What Are the Next Steps in the Legal Battle?

The WA Supreme Court is scheduled to hear arguments on the WA Capital Gains Tax January 23, 2023. Typically, arguments are heard on many cases over the course of several weeks in Jan & Feb, then the justices review those arguments, ask clarifying questions, and deliver their rulings later in the year. It’s possible we’ll know their decision before the April 15th tax filing date, but it’s not certain. It’s possible we won’t know their decision until after many people want to have filed their 2022 tax returns.

How Should I Prepare if I Have Realized Over $250,000 of Long-Term Capital Gains in 2022?

The tax on long-term capital gains over $250,000 will be 7% and does not apply to real estate sales.  The $250,000 exclusion is available for single files and married filing jointly; however, it is not doubled for married couples.

Any person accruing Washington capital gains in the year 2022 should consider paying the Washington capital gains tax by the April 15, 2023 filing date to avoid interest and penalties that could apply if the Supreme Court overturns this year’s Superior Court ruling. If one does pay the tax and the ruling is ultimately overturned, they would then file for a refund.

Are There Ways to Offset the Tax?

For anyone with charitable interests, another $100,000 can be added to the $250,000 threshold for some charitable contributions made in 2022.  The charitable contribution must be made to a Washington based charitable organization and the donation must be greater than $250,000 to receive any deduction.

Can I Use Capital Losses to Offset Capital Gains?

In short, yes, you can use some long-term losses to offset long-term gains but unlike Federal tax rules, you cannot use short term losses to offset long term gains.

Washington’s Capital Gain tax appears to be calculated differently than federal capital gains tax, in that gain/loss netting seems to work differently. This area is still being clarified, but what’s being clarified seems to include:

  1. It’s a tax on net long-term capital gain, so there appears to be no “offset” with short-term capital loss
  2. It’s a tax on Washington-sourced gain, so gain sourced to another state isn’t taxed
    1. Tangible personal property (like planes, trains & autos) is Washington gain for WA residents if the property is located in the state any time during the year sold or the year prior to sale.
    2. Stock and other internal personal property is sourced to the owner’s state of residency when sold (regardless of where the company operates or is headquartered).
  3. Whether or not a long-term loss carryforward (from a prior year) can be used to offset the tax isn’t clear.

When Should I Pay the Tax?

Given the SALT deduction limit of $10,000 we suspect few tax advisors will encourage immediately paying WA capital gains tax this year in order to claim a deduction against Federal taxes in 2022; they’ll probably advise pushing off payment as long as possible (until April 2023). Even if a Washington taxpayer files an extension, it seems likely to be in their best interest to pay the WA tax in April time to avoid interest and penalties.

The situation will become clearer with time but until then we recommend getting in touch with your tax advisor to determine your next steps; particularly if a charitable contribution this year could reduce your tax.

Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter.

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