On March 30, 2026, Washington Governor Bob Ferguson signed into law a bill imposing a 9.9% tax on Washington taxable income above $1 million. Commonly known as the “Millionaires’ Tax,” it takes effect on January 1, 2028 (first returns due in 2029), and will have significant implications for many Washington residents, part-year residents, and nonresidents with Washington-source income—including income from business interests, investments, employment compensation, and pass-through entity income connected to the state.

Key Changes

While Washington’s recently enacted capital gains tax is based on federally determined income tax concepts, this is Washington’s first tax enacted as an income tax. The tax is on Washington taxable income, which is based on an individual’s federal adjusted gross income (AGI), subject to certain state-specific modifications. These include exemptions/deductions for income from sales of real estate, interests in “qualified family-owned small businesses,” commercial cannabis activity, and certain Washington-sourced gambling losses, while state and local taxes deducted in computing federal AGI must be added back. Washington residents are generally taxed on their worldwide income, while part-year and nonresidents are taxed on their Washington sourced income.

The law provides a $1 million standard deduction per person, indexed annually for inflation. However, spouses and registered domestic partners only receive a $1 million combined deduction, whether they file jointly or separately. This deduction is higher than the standard deduction against the capital gains tax, so if a taxpayer’s income comes from taxable capital gains, they will still be responsible for filing for and paying Washington Capital Gains Tax but will receive a credit on their Washington Income tax return for Capital Gains Tax paid. Taxpayers may also claim up to $100,000 in charitable deductions per individual, with a combined cap of $100,000 for spouses.

To mitigate potential double taxation, the law also provides credits for amounts paid under Washington’s B&O and Public Utility taxes.

Washington also recently enacted an elective pass-through entity (PTE) tax, also effective on January 1, 2028. Owners of pass-through entities—such as partnerships, LLCs taxed as partnerships, and S corporations—may benefit from an entity-level election permitted under the law to pay their Washington income tax. Where an entity makes this election, individual owners receive a credit for their proportionate share of the tax paid by the electing entity.

Potential Planning Opportunities

Given the potential effects of the Millionaires’ Tax, business owners, investors, and individuals with significant Washington-source income might want to start exploring planning opportunities ahead of the January 1, 2028 effective date. Below are some examples (not an exhaustive list):

Changing domicile and residency: For tax purposes, residency is determined primarily by an individual’s physical presence and clear intent to change domicile, supported by objective evidence. Determinations of domicile and residency are highly fact specific. However, because the tax applies to Washington-sourced income no matter where the taxpayer lives, taxpayers will want to carefully analyze this when considering a change in residency.

Changing the structure of liquidity events: Washington’s capital gains tax applies to long-term capital gains greater than $270,000 (2026 threshold), while the income tax applies above $1 million. To mitigate tax exposure, individuals anticipating significant liquidity events—such as a business sale, substantial investment gains, or equity compensation vesting—may consider strategies to reduce/eliminate the amount of capital gains in favor of ordinary income in certain situations (note, however, that federal taxes generally favor capital gains treatment). In other situations, extending the timeframe for receiving payments could help reduce application of Washington capital and/or income taxes.

Qualifying for exemptions/deductions: Taxpayers looking at sales of business interests will want to analyze and take steps to qualify for available exemptions, including as a qualified family-owned small business. This might require restructuring or taking other steps prior to any planned sale. Because proceeds from sales of real estate are not subject to either tax, taxpayers will want to structure their transactions to take advantage of this where possible.

Allocating and apportioning multistate business income: Owners of multistate businesses should evaluate how income is sourced and apportioned to Washington and explore operational changes or restructuring to minimize the amount of income treated as Washington-source income.

Recent Developments

Although the Washington income tax has been enacted and is in effect, its fate is not yet settled. Two developments since enactment are worth monitoring closely.

Constitutional challenge: In April 2026, former Washington Attorney General Rob McKenna and the Citizens Action Defense Fund filed suit in Klickitat County Superior Court arguing that the tax violates the state constitution’s uniformity requirement for property taxation, relying on the Washington Supreme Court’s 1933 decision in Culliton v. Chase (and later decisions), which determined that income is considered property for Washington state tax purposes and therefore precludes a graduated income tax in the state. The case is expected to take roughly a year to reach the Washington Supreme Court, with many income tax supporters and commentators believing the Court will be persuaded to overturn Culliton, though that outcome is far from certain.

Repeal initiative on the November 2026 ballot: Initiative 645, which would repeal the Millionaires’ Tax outright and bar any future tax measured by individual income, qualified for the November 3, 2026 general election ballot after supporters submitted more than 500,000 signatures. If approved by voters, I-645 would eliminate the tax before it takes effect, though the non-income tax credits, exemptions, and deductions enacted alongside it (such as the B&O tax relief and sales tax exemptions) would remain in place. The Initiative is facing significant opposition, arguably including the controversial addition of a fiscal statement to the ballot by the Attorney General’s office stating the repeal will decrease funding for services (even though the tax won’t start being collected until 2029).

Taken together, these developments mean the Millionaires’ Tax remains valid and in force for planning purposes, but taxpayers should watch both the November ballot outcome and the pending constitutional litigation, either of which could materially change or eliminate the tax before its January 1, 2028 effective date.

Given the complexity of the new Millionaires’ Tax and how it interacts with other tax regimes, early and strategic planning is essential.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice with regard to your situation, you should contact an attorney.