The Washington legislature recently passed a new “millionaires tax.” Governor Ferguson signed the bill yesterday. Thus, starting in 2028, high-income Washington residents (and high-income nonresidents earning income in Washington) will pay a 9.9% income tax.
The first tax return won’t be due until 2029. But if you’re affected by the new tax? You want to understand mechanically how it works now. The formula varies from the federal tax formula. And you do have some planning options.
How New Washington Millionaire’s Tax Works
At first glance, many people assume this state income tax works like a traditional income tax system—with brackets, marginal rates, and complexity layered on top. But that mental model misleads. A better way to understand the tax? This is a flat tax with a one-size-fits-all deduction.
Conceptually, the tax formula works like this:
Step 1: Start with a taxpayer’s federal adjusted gross income (AGI)
Step 2: Make a handful of Washington-specific adjustments
Step 3: Subtract a $1,000,000 deduction
Step 4: Tax any positive remainder at a 9.9% flat tax rate
Two quick notes: First, that $1,000,000 standard deduction is per household and adjusted for inflation every other year. Second, the $1,000,000 Washington deduction essentially replaces the federal tax return’s standard deduction or itemized deductions total.
A Quick Example of How New Flat Tax Works
Let’s look at a quick example in the case where a taxpayer earns $2,000,000 of income:
• AGI: $2,000,000
• Less deduction: $1,000,000
• Taxable amount: $1,000,000
• Tax: $99,000
That’s all straightforward. But this flat tax gets more complicated as you dig into the details.
Step 2 Is Where Things Get Interesting
As noted, the Washington state millionaire’s tax starts with federal AGI. (See that list of steps above.) But Washington does not simply adopt that number. Instead, the statute requires a series of adjustments (again, step 2 above) to create what it calls:
“Washington base income” and ultimately “Washington taxable income.”
These adjustments complicate the tax. (That is bad.) And they also create planning opportunities. (Which is good.)
Here are the key modifications in plain English.
1. Long-Term Capital Gains Are Adjusted (But Separately Taxed)
Washington removes federal long-term capital gains from AGI and then mostly adds back Washington capital gains taxed under its separate capital gains tax system.
Translation:
• Federal capital gains don’t flow through directly
• They’re re-measured and tweaked under Washington’s capital gains rules
This keeps the two tax systems coordinated and avoids double taxation. (This also affects the taxation of residential property and small business sales, as discussed later.)
2. Tax-Exempt State and Municipal Bond Interest Gets Added Back
The formula adds-back interest excluded from federal AGI (like out-of-state municipal bond interest).
Example: $200,000 municipal bond interest (federally tax-exempt) isn’t typically included in the federal AGI. However, that amount may still be taxable in Washington. Thus, the formula adds-back that interest.
This is a classic “state decoupling” move.
3. State Taxes Deducted Federally Get Added Back
If you deducted certain taxes in computing federal AGI, Washington adds them back.
The add-backs for taxes include state income taxes (if applicable), Washington B&O taxes and pass-through entity (PTE) tax payments.
The logic here? Washington prevents you from reducing its tax base using deductions tied to other taxes.
4. Pre-2028 Net Operating Losses Are Disallowed
Net operating losses (NOLs) from before January 1, 2028 are added back to the federal AGI and, thus, not allowed to reduce Washington income. Only post-2028 losses get partial recognition. This is a major “reset” feature in the statute.
5. Interest on U.S. Government Obligations Is Subtracted
The formula subtracts interest from U.S. Treasury bonds, federal notes and similar federal obligations from Washington income. This follows long-standing constitutional principles limiting state taxation of federal obligations.
6. Wagering Losses Get Partial Relief
Washington allows a deduction for wagering losses: Up to 90% of losses (limited to wagering income). This matches the federal rules for 2026 and future years.
7. Cannabis Businesses Get a Special Deduction
Normally, businesses don’t get to deduct the expenses of operating an illegal or criminal enterprise because of IRC §280E. Washington state cannabis businesses, for example, cannot deduct ordinary expenses on the federal income tax return.
Washington reverses that result, however. It makes those disallowed expenses deductible for Washington purposes. This is a significant taxpayer-friendly adjustment for that industry.
8. A Few Niche Adjustments (Most Taxpayers Won’t Encounter)
The statute also includes several specialized rules:
• Incomplete nongrantor trusts: income may be pulled back into the individual’s tax base
• Tribal income: certain income is exempt
• Capital construction funds (vessel industry): deposits may be deductible.
For most taxpayers, these won’t matter—but they reflect how comprehensive the statute is. (And point, I guess, to why you want a well-connected lobbyist.)
Credits Matter Too
The Millionaire’s tax provides credits, too. (A $1000 credit reduces the state income tax amount by $1000.)
For example, Washington state gives you credit for business and occupation taxes it already levied against business income it wants to tax again. It also gives you credit for any Washington state capital gains it wants to tax again. (In effect with these credits, you pay tax once on income. Not twice.)
Washington state also gives you credit for income taxes you’ve paid other states. In the case where, for example, you’ve already paid another state (Arizona) income taxes on a $1,000,000 chunk of business income? Washington lets you reduce the amount of Washington state millionaires tax you owe on that same $1,000,000 for the other state’s (Arizona’s) taxes you’ve already paid.
Non-resident Millionaires Earning Income in Washington State Get Taxed
Non-resident millionaires with Washington state income get taxed too. And the flat tax works proportionally.
For example, a resident earning $2,000,000 AGI would pay about $99,000 in millionaires’ tax. (This is the example we used above.)
However, a nonresident earning $2 million total—two-thirds outside Washington and one-third inside—would pay roughly $33,000 of Washington millionaire’s tax, because both the income and the $1,000,000 deduction are prorated based on the share of income earned in Washington.
Note that the $33,000 is one third of the $99,000 millionaire’s tax a resident would pay.
Two Final Qualifications
The statute’s preamble suggests that sales of residential real estate and qualified family-owned businesses won’t be taxed—and importantly, that treatment does appear in the operative law.
But the mechanism is indirect: Washington removes federal long-term capital gains from income and then adds back only “Washington capital gains,” as defined under the state’s existing capital gains tax. Because that system already excludes real estate and provides a deduction for qualified family-owned businesses, those exclusions effectively carry over into the new millionaire’s tax. The result is that, while not stated in a single clean sentence in the statute, the intended treatment is largely implemented through cross-reference.
Other Resources
Washington State Millionaires’ Tax Residency Rules
Changing Your Washington State Residency
Qualified Family-Owned Business Deduction
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