In a landmark move to reshape its tax code, Washington state Senate Bill 5813 was signed into law May 20.  The new law introduces a tiered capital gains tax and increases the estate tax rates for high-value estates. 

According to the text of the bill, these changes aim to generate additional revenue for education and early learning programs while promoting a more progressive tax structure.

Progressive taxation

Washington has been criticized for having one of the most regressive tax systems in the country, relying heavily on sales and excise taxes. In 2021, the state took a major step by implementing a 7% capital gains tax on long-term investment income above $250,000. That law was upheld by the state Supreme Court in 2023, paving the way for further reforms.

Senate Bill 5813 builds upon the existing framework by introducing a progressive, two-tiered tax rate for capital gains, effective beginning in the 2025 tax year.

New capital gains tax brackets are as follows:

• 7% on Washington state capital gains up to $1 million.
• An additional 2.9% on Washington state capital gains exceeding $1 million (totaling 9.9%).

Keep in mind that the capital gains tax doesn’t apply to several categories of capital assets, including real estate. Further, the capital gains tax doesn’t apply until a taxpayer has capital gains over the standard deduction ($270,000 for 2024).

The Department of Revenue received just over 3,400 payments for tax year 2023, out of a total state population of nearly 8 million. That reflects the fact that around one-tenth of 1% of Washingtonians paid the capital gains tax in 2023. The Washington state Department of Revenue’s Fiscal Note on the new bill estimated that there would be approximately 900 taxpayers paying the higher 9.9% rate for tax year 2025, or a little more than 1/100th of 1% of Washingtonians.

While certainly consequential to some, the existing capital gains tax and its related expansion touch an exceedingly small portion of the population.

The new estate tax

Washington state—previously tied with Hawaii for the highest marginal estate tax rate in the country at 20%—has enacted a major overhaul of its estate tax system. Under the new law, the top marginal rate increases to a whopping 35% for the largest estates, marking a significant shift in how wealth transfers are taxed.

While this change may sound daunting, it’s important to note that the law also raises the exclusion amount—the threshold below which no estate tax is owed. As a result, most Washingtonians will actually either pay no estate tax or see a reduction in their estate tax liability.

More specifically, under the previous law the estate tax applied if the value of the estate was above $2.2 million, specifically $2.193 million. Working with an estate planning attorney, it's relatively straightforward to double that exemption amount to almost $4.4 million e.g., credit shelter trusts.

The new law raises the exclusion amount to $3 million with an annual inflation adjustment. Here again, working with an estate planning attorney, it should be straightforward to double the exemption amount to $6 million. So, under the new law, fewer taxpayers will need to pay any estate tax. But, the tax rate structure becomes more progressive, starting at 10% and rising to 35%.

This dual change—higher exemption and higher top rates—means that: (1) fewer estates will owe any tax at all; but (2) large estates will face a steeper tax bill. So where is the approximate break-even? That is, at what size estate will Washington taxpayers pay more under the new law and its more aggressive marginal tax brackets after considering the larger exclusion amount?

Based on a rough calculation for a married couple using standard estate planning envisioned above, the breakeven point appears to be around $14 million. That is, if your estate is valued at under $14 million, you’ll likely pay less under the new law. If your estate is valued at over $14 million, you’ll likely pay more.

This reform shifts the estate tax burden upward, targeting the wealthiest 1%, i.e., estates over $14 million, while easing the load for the remaining 99%.

Beau Ruff is an attorney and director of planning at Cornerstone Wealth Strategies Inc., in Kennewick, Washington.