Approved by the state legislature this month, Washington’s proposed Millionaires Tax would impose a 9.9% levy on household income exceeding $1 million annually. The bill will become law in April unless Governor Bob Ferguson vetoes it. Critically, the tax applies only to earnings above that threshold – not total income. If a household earns $1,000,500, only $500 is subject to the new Millionaires Tax resulting in approximately $50 of liability.
How the Tax Is Calculated
The 9.9% rate applies to Washington taxable income — a figure that starts with your federal adjusted gross income but with a few key adjustments. Washington’s own capital gains (such as stock sales) are substituted in place of federal long-term capital gains, and any Washington capital gains tax already paid generates a dollar-for-dollar credit, so there’s no double taxation. Real estate sales remain fully exempt, and most non-grantor trusts are also likely exempt. From there, every household receives a $1 million standard deduction (indexed for inflation each year), plus an additional charitable deduction of up to $100,000. The result: most of the complexity lives at the edges, and for many high earners, the effective taxable base will be meaningfully lower than their gross income.
If passed, the tax takes effect January 1, 2028, with first revenues reaching the state in 2029.
The Marriage Penalty
One structural quirk worth flagging: the $1 million standard deduction is the same regardless of filing status. A married couple filing jointly would receive the same $1 million exemption as a single filer – not $2 million. In practice, this means two spouses who each earn $600,000 (a combined $1.2 million) would owe tax on $200,000 of income, while two unmarried individuals with identical earnings would each fall under the threshold and owe nothing. Married couples in dual high-income households should factor this asymmetry into their planning conversations.
Why Now? The Fiscal Backstory
Washington is navigating a structural budget gap widened by federal funding reductions – particularly Medicaid reimbursements affected by the One Big Beautiful Bill Act passed last summer – alongside rising healthcare and education costs. Proponents estimate the tax would generate approximately $3.7 billion annually, with 93% directed to the state’s general fund supporting K-12 education, healthcare, and essential human services. The remaining 7% would fund a new County Public Defense Stabilization Account.
Other states are also considering additional taxes on high earners and the ultra-wealthy, as evidenced by California’s billionaire tax ballot measure.
Who Would Actually Be Affected
The rhetoric around a “millionaire tax” can suggest broad impact. The numbers tell a different story. Governor Ferguson said that it’s estimated roughly 20,000 Washington households (less than 1% of the state’s taxpayers) would be subject to this levy. More than 99% of Washingtonians would not pay this tax at all.
Washington is home to a significant concentration of technology executives, founders, and investors who generate substantial annual income through equity compensation, business exits, and portfolio distributions. Even a targeted rate applied to a small group could generate billions in annual revenue – unless those taxpayers start looking for a new state to live in!
Pass-Through Entities
For business owners whose income flows through S-corporations, partnerships, or LLCs, the proposal includes a meaningful structural option. Rather than the tax falling on the individual owner, the business itself may elect to bear the liability. This pass-through entity election can allow owners to claim a federal deduction for state taxes paid at the entity level — partially offsetting the Washington liability through federal tax savings. B&O taxes already paid on Washington taxable income would also be fully credited, reducing the effective burden further. The sale of qualified family-owned small businesses would be exempt.
Strategic Considerations
For those approaching or exceeding the $1 million threshold, proactive planning is more valuable than reactive adjustment. Several strategies merit consideration now.
Income timing and deferral – structuring compensation or distributions across tax years to manage exposure above the threshold – can be a meaningful lever. Charitable giving vehicles such as donor-advised funds or charitable remainder trusts allow for a reduction in taxable income while advancing philanthropic goals, particularly given the $100,000 charitable deduction available under this proposal.
For business owners, the pass-through entity election deserves careful modeling before 2028. And while domicile decisions are complex and personal, households with consistently high annual income should understand the cumulative impact of a 9.9% surcharge over time. We recommend that high earners work closely with their tax professional to manage their adjusted gross income.
Keep in mind that the proposal is not yet law, but it appears that the legislation has momentum, and high-earning Washingtonians should be prepared for it to pass.
Please reach out to your Wealth Manager to discuss how this proposed legislation may affect your Washington state income tax projections.
