If you’re a taxpayer likely affected by Washington’s new “millionaire tax?” Or you run a charity in Washington state? Yeah. You want to understand how the new millionaires’ tax limits charitable contributions.
The deduction works differently than you might guess (based on federal income tax rules.) And you have some workarounds and hacks you can use to escape some of the new millionaires’ tax’s cost. But let’s start with a quick review of the millionaire tax formula.
A Quick Review of Millionaire Tax Formula
The new system is really a two-bracket tax. A 0 % tax bracket applies to the first $1,000,000 of income. And then a 9.9% tax bracket applies to anything over that $1,000,000 tripwire.
The actual formula begins with the federal income tax return adjusted gross income but adjusts that number for things like Washington’s capital gains tax and the state’s hidden business and occupation taxes.
And the second technical detail to know: Only two deductions exist right now. One for charitable contributions. Another for gambling losses.
In a sense, all pretty simple. Two tax brackets. Two deductions.
Example: Say a taxpayer earns an adjusted gross income of $2,200,000, deducts a $100,000 charitable contribution and deducts $100,000 of gambling losses. In that case, the taxpayer shows $2,000,000 of taxable income. And he pays a 0% tax on the first $1,000,000 and a 9.9% tax on the second million.
Just to be clear: Other deductions taxpayers might expect don’t play into the Washington income tax formula: mortgage interest, medical expenses, casualty losses, and federal or state estate taxes.
Two Limitations
You also want to understand two limitations to the charitable contribution. First, the statute limits the charitable deduction to $100,000 per household (even if the taxpayer contributes far more).
Second, the statute counts as charitable deductions only contributions to a “qualified organization” which means a 501(c)(3)-type organization, principally directed or managed within Washington, and primarily benefiting Washington residents or communities.
Note: This should include a local house of worship or neighborhood charity anywhere in the state. But it probably doesn’t include donations to some out-of-state “national” or “regional” headquarters of a faith tradition or charitable organization. And it absolutely doesn’t include donations to a charity operating outside of Washington state.
Four Charitable Contribution Planning Ideas
With these details in hand, let me throw out a small handful of ideas I’ve found myself discussing with taxpayers. None of these completely dodge the limits. But they may help in certain situations.
Planning Idea #1: Use Qualified Charitable Distributions From IRAs
One of the best planning opportunities may involve qualified charitable distributions, or “QCDs.”
Taxpayers over age 70½ can direct IRA distributions straight to charity rather than receiving the money personally.
The advantage here is subtle but powerful. The QCD does not technically create a charitable deduction. Instead, the distribution simply never gets included in federal adjusted gross income in the first place. However, because Washington’s tax starts with federal adjusted gross income, the QCD may effectively shelter income from the Washington tax system entirely.
Example: Suppose a taxpayer historically donated $200,000 annually by writing checks to charities. Instead, they might make a $100,000 qualified charitable distribution directly from an IRA and separately write a $100,000 check. Economically, the taxpayer may then achieve a $100,000 reduction in adjusted gross income from the QCD, and a $100,000 Washington charitable deduction for the direct gift. That’s not identical to the old federal-style deduction system. But it may produce a surprisingly similar economic result.
Note: The QCD charity could even be directed to out-of-state charities and still in effect reduce the millionaire’s tax.
Planning Idea #2: Donate Appreciated Property Instead of Cash
Another potentially powerful strategy: contribute appreciated property rather than cash.
Suppose a taxpayer contributes stock worth $200,000 with a cost basis of only $10,000.
Under the Washington system the charitable deduction may still be capped at $100,000… but by gifting the taxpayer also avoids recognizing the $190,000 capital gain.
And avoiding the gain may matter more than the charitable deduction itself because it prevents Washington adjusted gross income from increasing in the first place.
This is similar to how charitable gifts of appreciated securities already work federally—but the strategy may become even more valuable under Washington’s new system.
Planning Idea #3: Swap Charitable Giving with Direct Community Investment
Business owners may also rethink how they contribute to their communities.
Suppose a business owner historically donated $200,000 annually to a local school, scholarship fund, or community nonprofit.
Under the Washington tax, only part of that contribution may reduce taxable income.
But if the business instead spends $200,000 on employee education, apprenticeships, technical training, or workforce development? Those expenditures may potentially remain fully deductible business expenses.
And economically, those expenditures may create just as much—or even more—community benefit.
This doesn’t mean charitable giving disappears. But it may change how some business owners think about creating local impact.
Planning Idea #4: Some Taxpayers May Simply Reduce Charitable Giving
One awkward possibility deserves mention.
Some affected taxpayers may simply reduce their charitable giving. And not necessarily out of anger. Or politics. Or out of spite.
Rather, some taxpayers may conclude that Washington state itself is now performing functions they previously tried to support privately.
If taxpayers already face a nearly 10% state income tax above $1,000,000, some may view paying that tax as their primary contribution (a tithe) toward social services, education, homelessness programs, or health care initiatives.
In other words, some taxpayers may reduce charitable giving as a deferential response to voter preferences and legislative priorities.
Whether that ultimately happens remains to be seen. But charities probably should pay attention to the possibility.
Final Thought
The new millionaires’ tax starts in 2028. You have time to think carefully about your giving (if you’re a taxpayer) or about your fundraising (if you’re a charity). But you want to do that “thinking.” And probably sooner rather than later. The charitable deduction limitations dramatically change the tax accounting for charitable contributions.
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