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 will not be due until 2029. But if you are affected by the new tax? You want to understand mechanically how it works now. This formula differs from the federal tax formula. And you have some planning options.
How the New Washington Millionaire’s Tax Works
At first glance, many people assume that this state income tax works like a traditional income tax system – with brackets, marginal rates, and complexities at the top. But that mental model is misleading. A better way to understand taxes? It’s a flat tax with a flat deduction for all.
Conceptually, the tax formula works like this:
step 1: Start with the taxpayer’s federal adjusted gross income (AGI)
step 2: Make some Washington-specific adjustments
step 3: Subtract the $1,000,000 deduction
step 4: Tax any positive balance at a 9.9% flat tax rate
Two quick notes: First, the standard deduction of $1,000,000 is per family and is adjusted for inflation every other year. Second, the $1,000,000 Washington deduction essentially replaces the standard deduction or itemized deductions on federal tax returns.
A quick example of how the new flat tax works
Let’s look at a quick example in a case where a taxpayer earns $2,000,000 of income:
• AGI: $2,000,000
• Low Deduction: $1,000,000
• Taxable amount: $1,000,000
• Tax: $99,000
It’s all straightforward. But as you get into the details, this flat tax becomes more complicated.
Step 2 is where things get interesting
As mentioned, Washington state millionaire’s taxes start at federal AGI. (See list of steps above.) But Washington doesn’t just adopt that number. Instead, the statute requires a series of adjustments to make it happen (again, step 2 above):
“Washington base income” and finally “Washington taxable income.”
These adjustments make taxes complicated. (This is bad.) And they also create opportunities for planning. (which is nice.)
Here are the main amendments in plain English.
1. Long-term capital gains are adjusted (but taxed separately)
Washington removes federal long-term capital gains from AGI and then adds most of the Washington capital gains back under its own separate capital gains tax system.
Translation:
• Federal capital gains do not flow directly
• They have been remeasured and modified under Washington capital gains rules
This keeps both the tax systems coordinated and double taxation can be avoided. (It also affects the taxation of residential property and small business sales, as discussed later.)
2. Tax-exempt state and municipal bond interest is added back
The formula adds interest excluded from federal AGI (such as out-of-state municipal bond interest).
Example: $200,000 of municipal bond interest (federally tax-exempt) is generally not included in federal AGI. However, that amount may still be taxable in Washington. Thus, the formula connects back to that interest.
This is a classic “state decoupling” step.
3. State taxes deducted federally are added back
If you deducted certain taxes when calculating federal AGI, Washington adds them back.
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 your tax base by using deductions associated with other taxes.
4. Net operating losses are not allowed before 2028
Net operating losses (NOLs) before January 1, 2028 are added back to federal AGI and, thus, are not allowed to reduce Washington’s income. Only losses after 2028 get partial recognition. This is a major “reset” feature in the statute.
5. Interest on US government obligations has been reduced
This formula subtracts interest from U.S. Treasury bonds, federal notes, and similar federal obligations from Washington’s income. This follows long-standing constitutional principles limiting state taxation of federal obligations.
6. Betting on losses provides partial relief
Washington allows a deduction for wagering losses: up to 90% of the loss (limited to wagering income). This matches federal rules for 2026 and future years.
7. Cannabis businesses get special cuts
Generally, businesses are not allowed to deduct the expenses of operating an illegal or criminal enterprise due to IRC §280E. Washington state cannabis businesses, for example, cannot deduct ordinary expenses on federal income tax returns.
However, Washington overturned that result. This makes those disallowed expenses deductible for Washington purposes. This is an important taxpayer-friendly adjustment for that industry.
8. Certain specific adjustments (most taxpayers will not face these)
The statute also contains several specific rules:
• Imperfect non-grantor trust: Income can be pulled back into the individual’s tax base.
• Tribal Income: There is exemption on certain incomes
• Capital Formation Fund (Shipping Industry): Deposits may be deductible.
For most taxpayers, these won’t matter—but they show how broad the law is. (And I think that points to why you might want a well-connected lobbyist.)
Credit matters too
The Millionaire’s Tax also provides a credit. ($1000 credit reduces state income tax amount by $1000.)
For example, Washington state gives you a credit for business and occupation taxes that have already been levied against business income it wants to tax again. It also gives you credit for any capital gains Washington state wants to retax. (With these credits in effect, you pay tax on income once. Not twice.)
Washington state also gives you a credit for income taxes paid in other states. In which case, for example, you have already paid income taxes to another state (Arizona) on $1,000,000 of business income? Washington lets you reduce the amount of Washington state millionaire tax you owe on the same $1,000,000 in taxes you already pay in another state (Arizona).
Non-resident millionaires earning income in Washington state are taxed
Nonresident millionaires with Washington state income are also taxed. And the flat tax works proportionally.
For example, a resident earning $2,000,000 AGI would pay approximately $99,000 in millionaires’ tax. (This is the example we used above.)
However, a nonresident earning a total of $2 million – two-thirds outside Washington and one-third inside – would pay about $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 $33,000 is one-third of the $99,000 millionaire’s tax paid by a resident.
two final qualifications
The preamble to the statute suggests that sales of residential real estate and qualified family-owned businesses will not be taxed – and importantly, this treatment appears in the operative legislation.
But the mechanism is indirect: Washington removes federal long-term capital gains from income and then adds only “Washington capital gains,” as defined under the state’s existing capital gains tax. Because that system already excludes real estate and provides deductions for qualifying family-owned businesses, those exclusions effectively get folded into the new millionaire’s tax. The result is that, while not stated in a single clear sentence in the statute, the intended treatment is implemented largely through cross-references.
other resources
Washington State Tax Residency Rules for Millionaires
Changing Your Washington State Residency
Qualified Family-Owned Business Deduction