As of January 1, 2022, Washington has implemented a 7% tax on the sale or exchange of long-term capital assets. Revenue from the tax will be used to fund the education legacy trust account and common school construction account.
This law was recently struck down as unconstitutional by Douglas County Superior Court JudgeBryan Huber, citing that it is an unconstitutional income tax, as well as being inequitable in its application. Attorney General Bob Ferguson has indicated that he will file an appeal, and the case is ultimately expected to be heard before the Washington State Supreme Court. We will continue to monitor this situation and will provide more information as it becomes available.
The Basics
- The 7% tax will apply to long-term capital gains over $250,000 for both individuals and married couples.
- The tax only applies to long-term capital gains; ordinary income, short-term gains, qualifieddividends and tax-exempt interest are excluded.
- The threshold will be adjusted annually for inflation.
- Gains that are not reportable on Federal tax returns are also not reportable to Washington.
- The tax applies to tangible personal property sold in Washington, even if the owner is not a Washington resident.
- If you pay capital gains tax to another jurisdiction (states or U.S. territories) on an asset sold in that other jurisdiction, a credit will be available on Washington taxes up to the amount of tax already paid. No carryforward will be allowed.
- A deduction of up to $100,000 per taxpayer is available for contributions of over $250,000 to Washington charities. This amount will be adjusted for inflation annually.
Businesses
- A business & occupation tax credit is included for B&O taxes due on the same sale or exchange for which Washington capital gains tax is due, in order to avoid double taxation.
- Capital gains from corporations and other entities are exempt, unless the entity is a pass-through such as a partnership or LLC.
- A long-term capital gain tax deduction is available for the sale of all or substantially all of aqualified family-owned small business.
Trusts
- The tax applies to capital gains in a grantor trust, including intentionally defective non-grantor trusts, because the gains pass through to the grantor’s tax return.
- Non-grantor trusts are exempt because the trust itself pays taxes, not the grantor.
- Washington beneficiaries of non-grantor trusts who receive distributions of long-term capital gains are subject to the tax.
Exemptions
- Sales or exchanges of the following assets are exempt from this tax:
- Real Estate
- Interest in privately held entities to the extent any gains are directly attributable to real estate owned by that entity
- Retirement account assets
- Sales or exchanges of certain depreciable assets used in a trade or business
- Livestock related to farming or forestry
- Dividends, distributions, timber and timberlands from Real Estate Investment Trusts that are derived from the sale or exchange of timber/timberlands
- Commercial fishing privileges
- Goodwill received from the sale of a franchised auto dealership
Potential Action Items
- Consider tax loss harvesting to offset long-term gains, when appropriate.
- Spread large gains over multiple years in order to keep the realized gains in a given year under the $250,000 threshold for the tax.
- Utilize highly appreciated assets for charitable donations or gifts to lower-incomebeneficiaries.
- This could include the use of Charitable Remainder Trusts in order to maintain an income stream from the assets, or the use of other non-grantor trusts.
- For those considering a change of residency, consider doing so prior to selling assets with large capital gains.
Important Disclosures: Nothing in this article is intended to provide, and you should not rely upon it for, accounting, legal, or tax advice or recommendations. We are not making any specific recommendations regarding any specific tax strategy, and you should not make any financial planning or tax decisions based on the information in this article. The intention of this article is educational, and it is intended only to discuss a few limited aspects of a very complex legislation. This article is not a comprehensive or complete summary of considerations regarding its subject matter. Each individual is in a differentsituation and has different items to address, and the options in this article are not appropriate for everyone. Please consult your Freestone client advisor and tax advisor regarding options specific to your needs.