Washington's New Income Tax Has a $27,000 Cliff Hiding in It
Picture two Washington households, identical in every way except one sold $1,000 more stock than the other. Under Washington's new income tax, that $1,000 difference could cost the second household more than $27,000.
That's not a typo, and it's not a marginal rate. It's a cliff, and it sits right at the capital gains tax deduction many of our clients plan around every year.
We've seen a few posts circulating about this quirk in Washington's new 9.9% income tax on income over $1 million, dubbed the "Millionaires' Tax" (passed as ESSB 6346), which takes effect January 1, 2028. So we read the statute ourselves to see whether it holds up. Here's what we found.
I do want to preface this by saying that this is our interpretation of the law. The Department of Revenue hasn't issued implementing rules yet, and the statute could change before it takes effect. Please confirm how this applies to you with your own advisor and tax counsel before acting on it.
How capital gains are treated
Washington already has a 7% capital gains excise tax on long-term gains above a standard deduction ($278,000 for 2025, indexed each year). The new income tax coordinates with it in three steps:
1. Remove all long-term capital gains from your income.
2. Add back the gains taxed under the capital gains tax, plus the $278,000 deduction.
3. Give a credit for the capital gains tax you paid.
The catch is that the statute says step 2 applies only to taxpayers owing capital gains tax that year. So whether your gains count toward the income tax depends on a yes/no question: did you owe any capital gains tax at all?
If you didn't owe any: your long-term gains are excluded from the income tax entirely.
If you owed even $1: all of your gains count, including the first $278,000.
The math
Take a household with $1.2 million of wages and other income:
| $278,000 of gains | $279,000 of gains | |
|---|---|---|
| Capital gains tax | $0 | $70 |
| Income counted for the new tax | $1,200,000 | $1,479,000 |
| Amount over $1M | $200,000 | $479,000 |
| Income tax at 9.9% (less $70 credit for capital gains tax paid) | $19,800 | $47,351 |
| Total Washington tax | $19,800 | $47,421 |
Bottom line: An extra $1,000 of gain costs $27,621 in additional Washington tax.
Who does this affect?
The cliff only applies to households with more than about $722,000 of wages and other income (excluding long-term gains). Below that, pulling the first $278,000 of gains back in doesn't push you past the $1 million threshold, so there's no income tax to trigger.
Between roughly $722,000 and $1 million of other income, the cliff is smaller, because only part of the $278,000 lands above $1 million. For example, a household with $800,000 of other income would see about a $7,800 jump instead of $27,000. At $1 million or more of other income, the full cliff applies.
Does this mean the 7% rate is gone?
For many high earners, effectively yes. If your household already has $1 million or more of other income, the practical Washington rate on long-term gains becomes 0% or 9.9%, with nothing in between. You still pay the 7% capital gains tax, but it's credited against the income tax, so your total ends up at 9.9% on every dollar of gain.
The 7% rate still matters for:
Households closer to $1 million. Gains fill the room below $1 million first, so the overall rate on gains lands somewhere between 0% and 9.9%.
Households whose income is mostly gains, such as retirees, ISO holders, or founders after an exit. When the capital gains tax is larger than the income tax, the capital gains tax is what you pay, and 7% remains the rate that applies.
2026 and 2027, before the income tax takes effect.
What this means for planning
For households already above $1 million of income, long-term gains kept at or under the annual deduction appear to escape Washington tax entirely. Cross the line, and effectively the entire gain is taxed at 9.9%. That makes a few strategies more valuable:
Spreading sales across tax years.
Harvesting losses. Note that only long-term capital losses offset long-term capital gains for Washington state capital gains tax purposes.
Gifting appreciated shares to charity instead of selling.
It also means that if you're going to cross the line, it's usually better to cross it decisively in one year than to land just over it.
The Washington Millionaires tax doesn't apply until 2028 income as currently written, reported in 2029. There's time to plan, and also time for the legislature or DOR to address this. We'll update this post if that happens.
DISCLOSURES:
Consilio Wealth Advisors, LLC ("CWA") is an investment adviser registered with the U.S. Securities and Exchange Commission ("SEC"). Registration does not imply any particular level of skill or training. CWA provides investment advisory services to clients nationally and notice-files in those states where notice filing is required. The views expressed represent the opinion of Consilio Wealth Advisors. Information does not constitute investment, tax, or legal advice.
Consilio Wealth Advisors does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action. Before investing, consider investment objectives, risks, fees, and expenses. Investments in securities involve the risk of loss, including loss of principal. Past performance is no guarantee of future returns. The views and opinions reflected in the content are subject to change at any time without notice. The content speaks only as of the date indicated. Some information was obtained from external sources. The information is believed to be accurate, but there is no guarantee that it is.
The example is hypothetical and provided for illustrative purposes only. It is based on the assumptions stated and does not reflect the tax circumstances of any actual client. Actual results will vary based on filing status, taxable income, deductions, investment activity, state and local taxes, future distributions, changes in tax law, and other individual circumstances. The example should not be interpreted as a projection or guarantee of tax results.
