If you’re a taxpayer who is likely to be affected by Washington’s new “Millionaires Tax”? Or do you run a charity in Washington state? Yes. You want to understand how the new millionaires’ tax limits charitable contributions.
The deduction works differently than you might think (depending on federal income tax rules.) And we have some solutions and tricks you can use to avoid tax costs for new millionaires. But let’s start with a quick review of the millionaire tax formula.
Quick Review of the Millionaire Tax Formula
there is a new system In fact 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 starts with federal income tax return adjusted gross income but adjusts that number for things like Washington’s capital gains tax and state hidden trade and business taxes.
Another technical detail to know: Only two deductions currently exist. One for charitable contributions. Another for gambling losses.
In a sense, everything is very simple. Two tax brackets. Two deductions.
Example: Assume a taxpayer earns adjusted gross income of $2,200,000, deducts charitable contributions of $100,000, and deducts $100,000 of gambling losses. In that case, the taxpayer shows taxable income of $2,000,000. And he pays 0% tax on the first $1,000,000 and 9.9% tax on the second million.
Just to be clear: Taxpayers can expect other deductions. No At play in the Washington income tax formula: mortgage interest, medical expenses, casualty losses, and federal or state property taxes.
two limits
You’ll also want to understand two limits on charitable contributions. First, the law limits the charitable deduction to $100,000 per household (even if the taxpayer contributes much more).
Second, the statute only counts as a charitable deduction contributions to a “qualified organization,” meaning a 501(c)(3)-type organization that is primarily directed or managed within Washington, and primarily benefits Washington residents or communities.
Comment: This should include a local house of worship or neighborhood charity anywhere in the state. But it probably does not include donations made to certain out-of-state “national” or “regional” headquarters of a faith tradition or charitable organization. And it absolutely doesn’t include donations made to any charity operating outside Washington state.
Four Charitable Contribution Plan Ideas
With these details in hand, I would like to put forward some of the smaller considerations that I have found myself discussing with taxpayers. None of these completely break boundaries. But they can help in some 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 send IRA distributions directly to charity instead of receiving the money personally.
The benefits here are subtle but powerful. The QCD does not technically create a charitable deduction. Instead, distributions are never included in federal adjusted gross income. However, because Washington’s tax starts at federal adjusted gross income, the QCD can effectively shelter income entirely from the Washington tax system.
Example: Let’s say a taxpayer has historically donated $200,000 annually by writing checks to charity. Instead, they can make a $100,000 qualified charitable distribution directly from the IRA and write a separate $100,000 check. Financially, the taxpayer can then take a $100,000 deduction in adjusted gross income from the QCD and a $100,000 Washington charitable deduction for the direct gift. This is not the same as the old federal-style deduction system. But it can produce surprisingly similar economic results.
Comment: QCD donations can also be directed to out-of-state charities and still effectively reduce the millionaire’s tax.
Planning Idea #2: Donate Valuable Assets Instead of Cash
Another potentially powerful strategy: Contribute appreciated assets instead of cash.
Suppose a taxpayer contributes $200,000 worth of stock with a cost basis of only $10,000.
The charitable deduction may still be limited to $100,000 under the Washington system… but making the gift also saves the taxpayer from recognizing a $190,000 capital gain.
And avoiding benefits matters more than the charitable deduction because it prevents Washington’s adjusted gross income from growing in the first place.
This is similar to how charitable gifts of appreciated securities already work federally—but the strategy could be even more valuable under Washington’s new system.
Planning Idea #3: Replace charitable donations with direct community investment
Business owners can also rethink how they contribute to their communities.
Let’s say a business owner has historically donated $200,000 annually to a local school, scholarship fund, or community nonprofit.
Under the Washington tax, only a portion of that contribution can reduce taxable income.
But what if the business instead spends $200,000 on employee education, apprenticeships, technical training, or workforce development? Those expenses could potentially remain fully deductible business expenses.
And economically, the community benefits from those expenditures can be just as much or even greater.
This doesn’t mean that charitable donations disappear. But it could change how some business owners think about making a local impact.
Planning Idea #4: Some Taxpayers Can Deduct Charitable Donations
One strange possibility deserves mention.
Some affected taxpayers may reduce their charitable donations. And not necessarily out of anger. Or politics. Or out of hatred.
Rather, some taxpayers may conclude that Washington State itself is now taking on actions that they previously tried to support privately.
If taxpayers already face a state income tax of approximately 10% above $1,000,000, some may choose to pay that tax as their primary contribution (tithe) to social services, education, homelessness programs or health care initiatives.
In other words, some taxpayers may reduce charitable donations as a respectful response to voter preferences and legislative priorities.
It remains to be seen whether this ultimately happens or not. But donors should probably take this possibility into consideration.
final thoughts
The new millionaires’ tax will begin in 2028. You have time to think carefully about your donation (if you’re a taxpayer) or about your fundraising (if you’re a donor). But you want to “think” that. And maybe sooner rather than later. The charitable deduction limitations dramatically change the tax accounting for charitable contributions.