The Washington State Supreme Court upheld the state’s new Capital Gains Tax, which had been challenged as unconstitutional in lower courts. The Supreme Court ruled the tax to be an Excise Tax, not an Income Tax. Consequently, Washington State taxpayers will need to comply with the new tax. We will provide additional information as it becomes available and can respond to any questions you may have. We have also attached the Court’s ruling, if you are interested.
Below is additional background on the tax, that was compiled prior to today’s ruling:
Since it hasn’t been in the news lately, many of you may have forgotten about the Washington State Capital Gains Tax, which was enacted in April 2021 and was scheduled to take effect January 2022. In March 2022, however, the Superior Court of Douglas County ruled the tax to be unconstitutional based on its characteristics as an income tax. Under Washington State law, income has historically been treated as a type of “property”, and under the state’s Constitution, any state taxes on property must be levied uniformly and cannot exceed a rate of 1%. The capital gains tax, however, is targeted toward high-income taxpayers and applies at a rate of 7%. The case was moved to the Washington State Supreme Court.
On November 30, 2022, the Department of Revenue (DOR) was granted a request to collect the tax while the case was pending. This meant that taxpayers with “adjusted capital gain” above $250,000 in 2022 would likely need to pay the tax even if it is ultimately ruled unconstitutional. In general, “adjusted capital gain” will be the taxpayer’s Federal long-term capital gain with certain exclusions, such as sales of real estate. Primarily, the tax will impact high-income taxpayers with large capital gains from non-retirement brokerage accounts or sales of non-real estate-holding business entities.
Please let us know if you have any questions regarding these issues.
The information contained within this blog and website are provided for informational purposes only and is not intended to substitute obtaining accounting, tax, or financial advice from a professional accountant. Please consult a professional regarding your specific situations. Contact our team for more information.