Washington Judges Redefined Income

On March 24, 2023, the Supreme Court of Washington State (SCOWA) voted 7-2 to preserve the validity of the state's contentious capital gains tax. The court's judgment opened the way for the state to levy a 7% tax on capital gains derived from the sale of stocks, bonds, and other assets worth more than $250,000. As a result, by April 18, 2023, deadline, Washington residents recognizing capital gains income (and non-residents participating in transactions occurring within the state) in 2022 will be required to compute and pay this new tax.

"The capital gains tax is an excise tax because taxpayers do not owe the capital gains tax merely by owning capital assets or capital gains, like a property tax."

Who does it apply to?

This tax only applies to individuals and couples with significant wealth, specifically those with capital gains above the threshold amounts, while excluding other forms of investment income such as short-term gains, dividends, and interest.?

Non-resident taxpayers may be taxed on capital gains earned by tangible property in Washington, but only residents are taxed on intangible asset profits.

If a small or large business owner realizes capital gains above the threshold amounts, they may be subject to the tax. However, the tax only applies to capital gains and not to other forms of business income, such as revenue from sales or services. Therefore, it's unlikely that the tax will have a significant impact on the day-to-day operations of most small or large businesses.?

Eligibility for deduction:

The capital gains excise tax in Washington State includes a family-owned small business deduction, which allows eligible taxpayers to exclude a portion of the capital gains from the sale of a qualifying small business from their taxable income. However, there are some qualifiers that must be met to be eligible for the deduction.

For example, let's say that a family-owned small business with gross receipts of $8 million decides to sell the business. If the sale qualifies for the family-owned small business deduction, the owners would be able to exclude a portion of the capital gains from the sale from their taxable income. However, if the business had earned more than $10 million in gross receipts in the 12 months preceding the sale, or if less than 90% of the business assets or the taxpayers' interest in the business were sold, the owners would not be eligible for the deduction.

Benefits for people:?

Firstly, the capital gains tax is expected to generate significant revenue for the state, which can be used to fund public services such as education, healthcare, and infrastructure. The revenue from the tax could help to address budget shortfalls and fund important programs that benefit the public.?

Secondly, the tax is structured so that it only applies to individuals and couples with significant wealth, specifically those with capital gains over $250,000 for individuals and $500,000 for joint filers. This means that the tax burden falls on those who can afford it the most while protecting lower-income and middle-class families from bearing the brunt of the tax.?

Lastly, the tax may encourage more equitable taxation in Washington State. Currently, Washington has one of the most regressive tax systems in the country, with low-income households paying a higher percentage of their income in state and local taxes than wealthy households. The capital gains tax has the potential to help address this imbalance by making the tax system more progressive.

What should you keep in mind?

If you are liable for the capital gains excise tax, you will need to file a return and pay the tax owed to the Washington State Department of Revenue. Taxpayers who owe the tax in a given year and are obligated to file must be prepared to file and pay the tax by April 18, 2023. Consult with a tax specialist to ensure that you are following all applicable tax rules and regulations.

Remember, a Washington capital gains tax return is required only if tax is owed, and it must be filed on or before the due date of your federal income tax return, including extensions.

How Smart Accountants will help you?

If you're wondering how to prepare and file your tax return or how to manage any surprises that might come up in state and local taxes, we've got you covered! Smart Accountants can help you navigate the requirements and ensure that you comply with all applicable laws and regulations. By working with a tax professional, you can ensure that you stay on top of your finances and avoid any potential penalties or legal issues.