Introduction

Residents of Washington have historically benefited from living in a state with no traditional income tax. However, recent legislation has begun to shift the state's tax landscape, particularly for higher-income households.

In addition to the existing state capital gains tax, lawmakers have proposed a new "millionaire tax" that could apply to residents with annual income exceeding $1 million.

For individuals with equity compensation, business ownership, or large investment portfolios, understanding how this proposal works—and how it could impact long-term planning—is increasingly important. Below is a practical Q&A overview of the proposed tax and what high-income households should consider.

What Is Washington's Proposed "Millionaire Tax"?

The proposal would create a 9.9% tax on annual income above $1 million for Washington residents. Importantly, the tax would only apply to the portion of income exceeding the $1 million threshold, rather than the entire amount.

For example:

• Household income: $1.3 million
• Amount above threshold: $300,000
• Estimated tax: $29,700

The intent of the proposal is to generate additional state revenue while limiting the impact to the highest-income households.

When Would the Tax Take Effect?

If implemented as proposed:

• Start date: January 1, 2028
• First tax filings: 2029

This delayed start means there may be several years for planning before the rules potentially take effect. However, like many tax proposals, the final implementation timeline could change due to legislative adjustments or legal challenges.

How Many Households Would Be Affected?

Estimates suggest the tax would impact roughly 20,000–30,000 households statewide, representing a small percentage of Washington residents. These households often include:

• Technology executives and employees with significant equity compensation
• Business owners
• Investors with large capital gains or investment income
• Professionals with very high annual compensation

In regions with strong technology sectors—such as the Seattle and Eastside areas—the impact may be more noticeable.

How Does This Differ From Washington's Capital Gains Tax?

Washington already has a state capital gains tax that applies to certain investment gains above a specified threshold. Key differences:

Table 1: Capital Gains Tax vs. Proposed Millionaire Tax

While the capital gains tax focuses specifically on investment profits, the proposed millionaire tax would apply to overall taxable income, including wages, bonuses, and equity compensation.

What Types of Income Could Push Someone Above $1 Million?

Many high-income years are driven by one-time or irregular income events rather than consistent salary. Examples include:

• Restricted stock unit (RSU) vesting
• Stock option exercises
• Sale of a business
• Large bonuses
• Major investment gains
• Significant Roth conversions

Because these events often occur in large, concentrated amounts, they can cause income to spike above the threshold in a single year.

What Planning Conversations Are Emerging Because of This Proposal?

Although the rules are not yet finalized, many advisors and high-income households are beginning to discuss several planning considerations.

1. Timing of major income events. Some individuals may evaluate whether certain transactions—such as stock sales or option exercises—occur before or after the proposed start date.

2. Managing uneven income years. Equity compensation can create large spikes in taxable income. In some cases, planning strategies aim to spread taxable income across multiple years to avoid concentrated exposure.

3. Business exit planning. Entrepreneurs expecting a future company sale may consider how the timing and structure of a transaction affects taxable income in a given year.

4. Long-term tax diversification. Many advisors are also revisiting broader strategies such as Roth conversion timing, charitable planning, and diversification of concentrated stock positions.

The goal is not necessarily to avoid taxes entirely, but to manage when and how income is recognized.

Could the Proposal Change Before It Becomes Law?

Yes. Several factors could alter the final outcome:

• Legislative revisions
• Voter initiatives or referendums
• Legal challenges related to state tax structure

Washington has historically faced constitutional questions surrounding progressive income taxes, which means future developments remain possible. For this reason, most planning discussions today focus on scenario planning rather than definitive action.

What Should High-Income Households Do Right Now?

For most individuals, the best approach is simply to stay informed and incorporate flexibility into long-term planning. Practical steps may include:

• Reviewing future equity compensation schedules
• Evaluating potential liquidity events
• Coordinating planning between financial advisors, tax professionals, and estate attorneys
• Building multi-year income projections

By understanding where large income events may occur, households can make more informed decisions if the tax landscape changes.

Final Thoughts

Washington's tax environment has evolved in recent years, and proposals like the millionaire tax illustrate how the landscape may continue to shift.

For households with significant income variability—particularly those with equity compensation or business ownership—proactive planning and awareness can help reduce surprises.

While the proposal may still evolve, understanding the potential impact today allows individuals and families to approach future decisions with greater clarity and confidence.

DISCLOSURE: Securities and Investment Advisory Services are offered through Osaic Wealth, Inc., member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth. Osaic Wealth does not offer tax or legal advice. This material is for general informational purposes only and is not intended to provide specific tax or legal advice. We suggest that you discuss tax and legal issues with qualified tax and legal professionals before making any decisions based on this information. Tax proposals discussed here are subject to change through the legislative process and are not guaranteed to become law.