Washington state long term capital gains tax

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010101
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Washington state long term capital gains tax

Post by 010101 »

Washington State passed a 7% tax on long term capital gains for any individual with more than $250k of LTCG in a year. This tax does not apply to trusts, companies, etc.

Any thoughts on how to legally avoid this tax? People helpfully suggest things like moving out or state, offsetting gains with losses, and just not selling.

I’m thinking of doing a DING/NING trust to address the tax. With the trust located in Nevada, it shouldn’t need to pay taxes to Washington state. Yes, there’s additional costs to setup but figure that it should pay for itself pretty quickly. I’ve never done a NING trust - any downside? Any other suggestions to avoid this tax?
Marseille07
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Re: Washington state long term capital gains tax

Post by Marseille07 »

010101 wrote: Sun Mar 26, 2023 12:16 pm Washington State passed a 7% tax on long term capital gains for any individual with more than $250k of LTCG in a year. This tax does not apply to trusts, companies, etc.

Any thoughts on how to legally avoid this tax? People helpfully suggest things like moving out or state, offsetting gains with losses, and just not selling.

I’m thinking of doing a DING/NING trust to address the tax. With the trust located in Nevada, it shouldn’t need to pay taxes to Washington state. Yes, there’s additional costs to setup but figure that it should pay for itself pretty quickly. I’ve never done a NING trust - any downside? Any other suggestions to avoid this tax?
Does this impact you?

Realizing 250K of LTCG in a year is a lot.
20cm
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Re: Washington state long term capital gains tax

Post by 20cm »

Marseille07 wrote: Sun Mar 26, 2023 12:19 pm Realizing 250K of LTCG in a year is a lot.
And the tax is on the amount above $250K, not the full LTCG.
kavm
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Re: Washington state long term capital gains tax

Post by kavm »

Does the tax include CG distributions from the mutual funds? If so, 250K threshold is not that difficult to achieve.

I just googled DING/NING trusts. The link I read uses Utah and California tax payers as examples. No idea if it is all above board and legal. So, will watch for replies her.
Marseille07
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Re: Washington state long term capital gains tax

Post by Marseille07 »

20cm wrote: Sun Mar 26, 2023 12:23 pm
Marseille07 wrote: Sun Mar 26, 2023 12:19 pm Realizing 250K of LTCG in a year is a lot.
And the tax is on the amount above $250K, not the full LTCG.
Thank you, that's an important point as well.
20cm
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Re: Washington state long term capital gains tax

Post by 20cm »

kavm wrote: Sun Mar 26, 2023 12:27 pm Does the tax include CG distributions from the mutual funds?
Yes, it does. It also includes undistributed LTCG retained in the fund.
Scorpion Stare
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Re: Washington state long term capital gains tax

Post by Scorpion Stare »

Some very important notes:
  1. The tax is only on the amount exceeding $250,000, so if you have $251,000 in realized gains this year, you would owe only $70 in tax (7% of $1000).
  2. Gains from the sale of real estate are exempt.
  3. The sale of a family-owned business is deductible.
And of course the tax is only on net gains, and only on realized gains. If you are constantly realizing hundreds of thousands of dollars every year in stock market gains, you may owe a significant amount. But if you have a one-time windfall, you may be able to spread it over time to take advantage of the $250k/year standard deduction.

For example, suppose you bought $100,000 of TSLA stock at the start of 2020, so you are currently sitting on $445,000 in unrealized gains. If you decide to sell all of it today for $545,000 and have no realized losses to offset it, you will pay $13,650 in state capital gains tax (($445k - $250k) * 7%). But if you sell only half this year you will owe zero dollars in state capital gains tax. You can continue to pay zero tax if you sell the remaining half next year at a similar or lower price. (If the price increases by next year, you may need to sell the remainder over the next two or more years instead to completely avoid the new tax.)

You can also use tax loss harvesting and tax gain harvesting to smooth your gains over time.
Last edited by Scorpion Stare on Sun Mar 26, 2023 1:20 pm, edited 3 times in total.
Marseille07
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Re: Washington state long term capital gains tax

Post by Marseille07 »

20cm wrote: Sun Mar 26, 2023 12:29 pm Yes, it does. It also includes undistributed LTCG retained in the fund.
What about offsetting capital-loss carryover allowed in federal? Washington State wouldn't recognize that?
Scorpion Stare
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Re: Washington state long term capital gains tax

Post by Scorpion Stare »

Marseille07 wrote: Sun Mar 26, 2023 12:47 pm What about offsetting capital-loss carryover allowed in federal? Washington State wouldn't recognize that?
The tax is on adjusted capital gain which is equal to “the net long-term capital gain reportable for federal income tax purposes,” adjusted to exclude both gains and losses “not allocated to Washington” (specifically certain sales of tangible personal property located outside of Washington state, or sales of intangible property made while the taxpayer is not domiciled in the state).

It does allows capital loss carryovers, except any portion from sales or exchanges “not allocated to Washington.”
Last edited by Scorpion Stare on Sun Mar 26, 2023 1:27 pm, edited 1 time in total.
Marseille07
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Re: Washington state long term capital gains tax

Post by Marseille07 »

Scorpion Stare wrote: Sun Mar 26, 2023 12:56 pm The tax is on adjusted capital gain which is equal to “the net long-term capital gain reportable for federal income tax purposes,” adjusted to exclude both gains and losses “not allocated to Washington” (mainly certain sales of tangible personal property located outside of Washington state).

It does allows capital loss carryovers, except any portion from sales or exchanges “not allocated to Washington.”
Thank you!
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anon_investor
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Re: Washington state long term capital gains tax

Post by anon_investor »

20cm wrote: Sun Mar 26, 2023 12:29 pm
kavm wrote: Sun Mar 26, 2023 12:27 pm Does the tax include CG distributions from the mutual funds?
Yes, it does. It also includes undistributed LTCG retained in the fund.
What about for ETFs?

Wait aren't realized LTCG in a mutual fund always required to be distributed?
Scorpion Stare
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Re: Washington state long term capital gains tax

Post by Scorpion Stare »

anon_investor wrote: Sun Mar 26, 2023 1:11 pm What about for ETFs?
Since the state tax is only on gains that are reportable for federal income tax purposes, the rules are the same as for your federal income tax return.
20cm
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Re: Washington state long term capital gains tax

Post by 20cm »

anon_investor wrote: Sun Mar 26, 2023 1:11 pm
20cm wrote: Sun Mar 26, 2023 12:29 pm
kavm wrote: Sun Mar 26, 2023 12:27 pm Does the tax include CG distributions from the mutual funds?
Yes, it does. It also includes undistributed LTCG retained in the fund.
What about for ETFs?

Wait aren't realized LTCG in a mutual fund always required to be distributed?
https://www.irs.gov/forms-pubs/about-form-2439
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anon_investor
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Re: Washington state long term capital gains tax

Post by anon_investor »

20cm wrote: Sun Mar 26, 2023 1:34 pm
anon_investor wrote: Sun Mar 26, 2023 1:11 pm
20cm wrote: Sun Mar 26, 2023 12:29 pm
kavm wrote: Sun Mar 26, 2023 12:27 pm Does the tax include CG distributions from the mutual funds?
Yes, it does. It also includes undistributed LTCG retained in the fund.
What about for ETFs?

Wait aren't realized LTCG in a mutual fund always required to be distributed?
https://www.irs.gov/forms-pubs/about-form-2439
Just get ETFs then, no capital gains.
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Post by alvinsch »

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er999
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Re: Washington state long term capital gains tax

Post by er999 »

I did read the $250k threshold is inflation indexed so won’t be hitting the middle class after 20-30 years of inflation unless they change it.

If it affects you significantly. probably need to move. I’m moving to Washington from Oregon as I am a relatively high w2 income so not worried about this tax (and am happy to escape the income tax). Good thing is there are a lot of options in the US so easy to vote with your feet.
suemarkp
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Re: Washington state long term capital gains tax

Post by suemarkp »

And if it wasn't obvious from the above, capital gains from retirement accounts (IRAs, 401Ks, etc) won't be affected because they don't distribute capital gains to you, as all money there is non qualified (or totally exempt if a Roth). IT will be what is in your taxable accounts that matter. So learn how to tax gain harvest if you're in WA and try to plan ahead if you need to do huge sells to break things up or at least choose which shares you are selling to manage the tax threshold.

The people who will be hit hard are those who are paid in stock options and can't break up their realization of capital gains into chunks of $250K or smaller. I'm more afraid of the future when most people this would affect have found a way to shelter it and the income from the tax doesn't meet the state's expectations.
Mark | Somewhere in WA State
rkhusky
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Re: Washington state long term capital gains tax

Post by rkhusky »

It will be interesting to see how much of the expected $500M shows up in the state’s coffers by 4/18, considering the court ruling that it’s an excise tax and not an unconstitutional income tax just came down on Friday.
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quantAndHold
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Re: Washington state long term capital gains tax

Post by quantAndHold »

Don’t have over $250k in gains in a single year.
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TinyHouse
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Re: Washington state long term capital gains tax

Post by TinyHouse »

Does this include real estate sales? Is this in addition to the above $500k excise tax for real estate?
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Re: Washington state long term capital gains tax

Post by suemarkp »

Real estate sales are excluded, supposedly. I'm not sure how they resolve this if they are just taking numbers from your federal tax form, as I have not looked are the DOR forms.
Mark | Somewhere in WA State
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Re: Washington state long term capital gains tax

Post by 2pedals »

[Quotation of a removed off-topic post has also been removed - moderator Claycord]

https://dor.wa.gov/taxes-rates/other-ta ... -gains-tax

Interestingly,
In the case of spouses or domestic partners, the combined standard deduction is limited to $250,000 whether they file joint or separate returns.
Honey the good news is we can double our standard deduction today, but unfortunately, you need to sign these divorce papers now that include in-kind transfers for you and me! :twisted:
OrangeKiwi
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Re: Washington state long term capital gains tax

Post by OrangeKiwi »

alvinsch wrote: Sun Mar 26, 2023 6:39 pm efforts to get around the state constitution forbidding an income tax,
FYI, Article 7 section 1, which prohibits marginal income taxes, but allows uniform income tax (because WA supreme court has previously ruled income is property):
All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word "property" as used herein shall mean and include everything, whether tangible or intangible, subject to ownership.
http://leg.wa.gov/CodeReviser/Pages/WAConstitution.aspx
rkhusky
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Re: Washington state long term capital gains tax

Post by rkhusky »

OrangeKiwi wrote: Sun Mar 26, 2023 8:07 pm
alvinsch wrote: Sun Mar 26, 2023 6:39 pm efforts to get around the state constitution forbidding an income tax,
FYI, Article 7 section 1, which prohibits marginal income taxes, but allows uniform income tax (because WA supreme court has previously ruled income is property):
All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word "property" as used herein shall mean and include everything, whether tangible or intangible, subject to ownership.
http://leg.wa.gov/CodeReviser/Pages/WAConstitution.aspx
So Washington could levy a flat income tax with no exemptions?
OrangeKiwi
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Re: Washington state long term capital gains tax

Post by OrangeKiwi »

rkhusky wrote: Sun Mar 26, 2023 8:41 pm
OrangeKiwi wrote: Sun Mar 26, 2023 8:07 pm
alvinsch wrote: Sun Mar 26, 2023 6:39 pm efforts to get around the state constitution forbidding an income tax,
FYI, Article 7 section 1, which prohibits marginal income taxes, but allows uniform income tax (because WA supreme court has previously ruled income is property):
All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word "property" as used herein shall mean and include everything, whether tangible or intangible, subject to ownership.
http://leg.wa.gov/CodeReviser/Pages/WAConstitution.aspx
So Washington could levy a flat income tax with no exemptions?
Yes, up to 1%, and any additional would have to be voted in continuously as a levy, I am pretty sure. But it has to be the same for everyone.
unwitting_gulag
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Re: Washington state long term capital gains tax

Post by unwitting_gulag »

Interestingly, Tennessee recently abolished their capital gains tax, and New Hampshire has commenced the process of doing the same, reducing the tax by a percentage point every year, until it reaches zero. Odd, that of the states that don't tax W2 income, one state would start ramping up their capital gains tax, while two others are going the other way.
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Re: Washington state long term capital gains tax

Post by ClaycordJCA »

A series of off-topic political and trolling posts and replies addressing potential changes to existing WA tax law, favoring a more progressive tax system, and rendering opinions about conditions in WA state were removed. Please limit your replies so they address OP’s request for suggestions on lawful ways to avoid the tax.
tomsense76
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Re: Washington state long term capital gains tax

Post by tomsense76 »

Under what conditions does one need to file?

1. Any capital gains (even if negative so losses)
2. Any positive capital gains
3. Any capital gains over the deduction amount
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Re: Washington state long term capital gains tax

Post by milktoast »

If you are dealing with a single large capital gains event (IPO) look at using a CRUT to realize the gains over time.

A joint CRUT for my wife and I (54 and 50) could pay 7% a year. If you consider a $3M one time event, you can shift from a 20+3.8+7% LTCg rate to a 15% rate, starting with $210k the first year and falling over time. The break even point is not that bad (under 20 yr joint lifetime). I have an earlier post that explored this mathematical model in more depth.
Marseille07
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Re: Washington state long term capital gains tax

Post by Marseille07 »

tomsense76 wrote: Wed Mar 29, 2023 12:11 am Under what conditions does one need to file?

1. Any capital gains (even if negative so losses)
2. Any positive capital gains
3. Any capital gains over the deduction amount
I think you just look at capital gains (minus CL carryover and everything else) on your federal return then if you have LTCG of 250K+ then you file to pay taxes to Washington State.
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010101
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Re: Washington state long term capital gains tax

Post by 010101 »

Note for others that are looking into this. Unfortunately, it seems that page 6 of the law prohibits NING/DING trusts from being used in this manner.

https://lawfilesext.leg.wa.gov/biennium ... 0329181649
(i) An individual is considered to be a beneficial owner of long-term capital assets held by an entity that is a pass-through or disregarded entity for federal tax purposes, such as a partnership, limited liability company, S corporation, or grantor trust, to the extent of the individual's ownership interest in the entity as reported for federal income tax purposes.
(ii) A nongrantor trust is deemed to be a grantor trust if the trust does not qualify as a grantor trust for federal tax purposes, and the grantor's transfer of assets to the trust is treated as an incomplete gift under Title 26 U.S.C. Sec. 2511 of the internal revenue code and its accompanying regulations. A grantor of such trust is considered the beneficial owner of the capital assets of the trust for purposes of the tax imposed in this section and must include any long-term capital gain or loss from the sale or exchange of a capital asset by the trust in the calculation of that
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Re: Washington state long term capital gains tax

Post by aboose »

unwitting_gulag wrote: Sun Mar 26, 2023 11:54 pm Interestingly, Tennessee recently abolished their capital gains tax, and New Hampshire has commenced the process of doing the same, reducing the tax by a percentage point every year, until it reaches zero. Odd, that of the states that don't tax W2 income, one state would start ramping up their capital gains tax, while two others are going the other way.
Washington is desperate to levy taxes in any way they can on residents as they are basically unable to do any sort of true income tax due to the state constitution.
VT1987
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Re: Washington state long term capital gains tax

Post by VT1987 »

Does anyone know if you have to make estimates for 2023? I understand we are paying for 2022 now.

But assuming we know we will owe tax for 2023, do we have to make estimated payments?
Marseille07
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Re: Washington state long term capital gains tax

Post by Marseille07 »

aboose wrote: Wed Mar 29, 2023 8:34 pm Washington is desperate to levy taxes in any way they can on residents as they are basically unable to do any sort of true income tax due to the state constitution.
I wonder why though. Don't other no-income tax states face similar issues? It seems like Washington State is the only one getting desperate.
billaster
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Re: Washington state long term capital gains tax

Post by billaster »

Marseille07 wrote: Mon Apr 03, 2023 11:59 am
aboose wrote: Wed Mar 29, 2023 8:34 pm Washington is desperate to levy taxes in any way they can on residents as they are basically unable to do any sort of true income tax due to the state constitution.
I wonder why though. Don't other no-income tax states face similar issues? It seems like Washington State is the only one getting desperate.
I don't think the reason is that they are desperate for revenue. I think the reason is that they are trying to reduce the current regressive tax system in which low income people pay a higher effective tax rate than high income people.

Washington is rated the most regressive tax system in the nation with low income people paying around 17% of income and high income people paying around 3%.
cowbman
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Re: Washington state long term capital gains tax

Post by cowbman »

The problem is the IRS has recognized capital gains taxes as an income tax.
billaster
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Re: Washington state long term capital gains tax

Post by billaster »

cowbman wrote: Sat Apr 08, 2023 8:00 pm The problem is the IRS has recognized capital gains taxes as an income tax.
The IRS has no jurisdiction over the state of Washington's tax system so what they think is irrelevant. The Washington State Supreme Court ruled that it is an excise tax on the exchange of assets, similar to a car sale, not a tax on capital gains income.
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Re: Washington state long term capital gains tax

Post by LadyGeek »

Additional off-topic conjecture discussing changes to WA state tax for capital gains, SALT, and other taxes has been removed (proposed legislation).

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