On Friday, March 24, 2023, the Washington State Supreme Court announced their 7-2 ruling upholding the 7% capital gains tax approved by lawmakers two years ago. The majority of the court concluded that the capital gains tax is constitutional because it is an excise tax levied on the sale or exchange of capital assets, and not the capital assets or gains themselves.
Only time will tell whether this decision will encourage lawmakers to experiment with other types of taxes, such as a wealth tax, that target high-earners but are structured differently than traditional income taxes.
Capital Gains Tax Implications for 2022
If you are a Washington resident with long-term capital gains in excess of $250,000 in 2022, you may be subject to the long-term capital gains tax. Washington’s capital gains tax return has the same due date as the federal individual income tax return. Washington residents that receive an extension to file their federal income tax return will also have the same filing extension for their capital gains tax return. However, you must notify WA DOR that you have a valid federal extension no later than April 18, 2023 in order to avoid late filing penalties.
Importantly, an extension to file does not extend the payment due date for the capital gains tax due. Even with the extension, taxpayers must remit their estimated capital gains tax to the WA DOR no later than April 18, 2023. Penalties and interest will apply to late payments.
For additional information about Washington’s capital gains tax, see our previous post.
Next Steps to Mitigate Capital Gains Tax
Washington’s capital gains tax is imposed on individuals only and not on business entities. However, the tax may be applicable to gains from pass-through entities. Below are some strategies to consider that may help to alleviate the tax burden.
- Review your stock holdings and consider long-term loss harvesting to reduce your capital gains.
- Delay recognition of short-term capital losses until they qualify as long-term to offset the capital gains.
- Bundle charitable donations. Instead of giving the same sum over multiple years, consider “bundling” donations into a one large donation. Also consider donating appreciated securities instead of cash. To qualify for the charitable deduction for WA capital gains tax computation purposes, donations must be to 501(c)(3) organizations directed or managed in Washington state and be greater than $250,000 per year. The charitable donations deduction cannot exceed $100,000 per year. Amounts are adjusted for inflation annually.
- Consider maxing out retirement accounts such as 401(k), SEP IRA, IRA, etc. Capital gains tax does not apply to transactions in retirement accounts.
- Make sure appropriate federal treatment is taken on the return, for example Section 1202 small business stock exclusion or opportunity zone investment deferral.
- Implement long-term capital gains smoothing strategies to stay below $250,000.
- Review current gift planning.
- If you are traveling frequently for your job or spend most of the year in another state, review your residency with your tax advisor.
If you have any questions how the capital gains tax affects you, please reach out to your BWA service team or your tax advisor.
The material has been gathered from sources believed to be reliable, however BWA cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. This article is not intended to provide tax or legal advice, and nothing contained in these materials should be taken as such. To determine which strategies may be appropriate for you, consult your tax and financial professionals. Investment Advisory services are offered through Bordeaux Wealth Advisors, LLC. Advisory services are only offered where Bordeaux and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place.