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Washington State has passed a sweeping budget bill that includes increased capital gains tax for high-income earners. Governor Bob Ferguson signed the bill into law, which also includes increases in gas taxes, business taxes, and adjustments to the estate tax.
Key Changes to Capital Gains Tax:
- Initially, a 7% tax on long-term capital gains was above the exemption ($270,000 in 2024).
- Effective January 1, 2025, a 2.9% surcharge will apply to net capital gains exceeding $1 million over the exemption.
- Top effective rate rises to 9.9%.
- Exemptions continue for real estate, retirement accounts, and many small businesses.
- Less than 8,200 households expected to be impacted.
- Up to $100,000 in charitable deductions allowed.
Political and Legal Context:
- The tax, implemented in 2022, was upheld by the Washington Supreme Court and survived a repeal attempt in the 2024 elections.
- Critics argue it could harm small businesses and spur wealth migration.
- State data shows no significant out-migration; the tax generated $786 million in its first year.
Comparison to Other States:
- Washington’s 9.9% rate aligns with Oregon and is below California (13.3%) and Hawaii (11%).
- The high exemption threshold limits the number of residents affected compared to other states.
Additional Tax Changes in the Budget:
- Gas Tax: Increases by 6 cents (regular) and 12 cents (diesel) per gallon starting July 1, 2025; automatic 2% annual increase starts mid-2026.
- Estate Tax: Exemption raised to $3 million; top rate increased to 35% for estates over $9 million.
- New Sales Taxes: Applied to temporary staffing, advertising services, rented self-storage, and electric vehicle credits.
Affected taxpayers must adjust their financial planning for the retroactive capital gains tax rate increase, which is applicable from January 1, 2025. Despite concerns, the state expects the tax changes to support infrastructure and public services without triggering mass departures of high-income residents.
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