You maybe need to file a Washington state capital gains tax return with your 2022 federal tax return.
Specifically, if you realized long-term capital gains in 2022 of more than $250,000 and you’re a Washington resident. you need to file a Washington state capital gains tax return.
And if you’re not a resident but you realized more than $250,000 of long-term capital gains inside Washington state, you need to file the return.
Unfortunately, the whole process is tricky. And messy. So let’s go over the details. And quickly. You don’t have much time.
When You Need to File
The statute and the Washington State Department of Revenue says you only need to file the income tax return if you have to pay the new capital gains tax.
Thus, if you can wriggle out from under the tax by using one of the exemptions or deductions? (See this blog post at our CPA firm website for more information: Washington State Capital Gains Tax Planning.) Even though your long-term capital gains cross that $250,000 threshold? You can skip this goat rodeo.
Note that this approach differs from the way federal and most other state’s income tax laws work. Usually if your gross income is high enough, you file. Even if in the end you don’t owe tax due to deductions or credits.
Confusingly, this approach also differs from the way Washington state handles state estate tax returns and other excise tax returns like the business and occupation tax. (Washington state requires estates to file a state estate tax return if the gross estate exceeds the $2,193,000 threshold.)
Getting Ready to File Washington State Capital Gains Tax Return
Reflecting the state’s inexperience with administering an income tax, Washington State requires taxpayers to use their poorly designed, cumbersome SAW system for filing capital gains tax returns.
In a nutshell, the process works like this if a taxpayer will delegate the return preparation to a tax accountant:
- A taxpayer creates a SAW account (Details here: https://dor.wa.gov/manage-business/my-dor-help/set#saw.)
- The taxpayer registers a capital gains account for her or his SAW account (Details here: Capital Gains – My DOR help | Washington Department of Revenue )
- The taxpayer adds the tax accountant as a user to the SAW account. The Department of Revenue suggests you add your tax accountant as an “Account Manager” user. That won’t work well for any situation where your accounting firm employs more than one accountant. You want to add your tax accountant as an “Administrator.” (Details here: Information on electronic filing for tax preparers | Washington Department of Revenue )
- Engage your tax accountant to prepare the tax return.
- When the tax return is complete, sign on to your SAW account, access your capital gains account, review the tax return and then, if it’s correct and complete, you then both file the tax return and pay the capital gains tax.
ABCs of Preparing Capital Gains Tax Return
You can tell the Washington State Department of Revenue doesn’t really understand how the federal income tax return works. And that’ll probably create all sorts of confusion as they process the capital gains tax returns.
In a nutshell, though, you enter the long-term capital gains information that shows up on the summary Schedule D form in the federal 1040 return. Then—and I kid you not—you enter each capital gains transaction that Washington state taxes.
If you invest using a rebalancing strategy (like Betterment), you or your accountant may have hundreds or even thousands of transactions to enter. By hand. The system doesn’t provide a way (yet?) to import transactions.
And then this friction point: The Department of Revenue’s instructions say you enter the detail that shows up on the Form 8949. But as any experienced tax accountant and many taxpayers know, most capital gain transactions don’t actually appear on the 8949 form. I can’t imagine that misunderstanding on the part of the Department of Revenue will produce good results for taxpayers.
What I think you ought to do is use the IRS instructions for preparing the 8949 and then complete the Washington state capital gains tax return as best you can.
If You Have Trouble with the Website
If you have trouble with the website or the process? Don’t call your tax accountant. Sorry. She or he can’t solve the problem.
Rather, call the Washington State Department of Revenue. Here’s the telephone number: 360-705-6655.
Another suggestion? If you do have trouble with the process? Like you can’t easily use the SAW system? Or the capital gains webpages don’t work well? Call or write your state legislators. (Contact information here: Washington State Legislature Member Information. ) Seriously. These men and women probably aren’t ever going to experience the system they decided you need to now use. Any feedback you can give them will encourage them to work to improve the process.
Extending the Due Date of the Return
One final suggestion: The state says if you extend your federal income tax return you automatically extend your Washington state capital gains tax return too. You probably want to do that.
Here’s why: The Supreme Court decided on March 25, 2023 you would need to file this tax return by April 18, 2023. But that late notice doesn’t give you or your accountant time to learn the law. Or if you’ve got a lot of transactions, time to manually enter the data.
But this caution: You need to have really good proof you extended. Probably you want to have your tax accountant electronically extend the federal tax return. If you don’t use a tax accountant, you should probably make an extension payment for your return to get extension documentation you can show state. (You can use this IRS web page to make an extension payment: Make an IRS Payment.)