Does a Trust or Estate Owe Washington Capital Gains Tax
In 2023, the Washington Department of Revenue began collecting a state capital gains tax, which is separate from the federal capital gains tax, on capital gains occurring after January 1, 2022. The state did not collect the tax until after the Washington Supreme Court upheld the tax’s constitutionality in a March 2023 decision. It was appealed to the U.S. Supreme Court, but the U.S. Supreme Court denied the petition to review this decision on January 16, 2024. Today, it feels safe to say that the Washington capital gains tax is not going away anytime soon, and it’s a good idea for Washingtonians to understand when the tax does, and does not, apply.
Unlike the exclusion amount for Washington’s estate tax, which has not increased since 2018, the standard deduction for the Washington capital gains tax increased for the 2023 tax year. For 2023, the standard deduction for Washington’s capital gains tax increased to $262,000 (from $250,000); the threshold for the charitable donation deduction also increased to $262,000 (from $250,000); and the worldwide gross revenue limit for a qualified family-owned small business deduction increased to $10.480 million (from $10 million). Expect an updated deduction for the 2024 tax year to be announced in December, as the Washington Department of Revenue must adjust the amount of the capital gains tax deduction each year.
The statute includes a list of exemptions to the Washington capital gains tax. These exemptions, found at RCW 82.87.050, include sales or exchanges involving:
- Real estate
- Retirement accounts
- Assets sold under threat of condemnation by a government entity
- Cattle, horses, or breeding livestock
- Timber and timberland (including Christmas trees)
- Commercial fishing privileges for state and federal fisheries subject to catch share management measures
- Goodwill received from the sale of a franchised auto dealership
Property owned by trusts and estates is not on the list of exemptions. Does this mean that Washington trusts and estates are subject to the state capital gains tax? It does not. Irrevocable trusts, estates, and revocable living trusts that become irrevocable after the death of the grantor are not subject to the state capital gains tax because the statute, at RCW 82.87.040, imposes a tax on “an individual’s Washington capital gains” [emphasis added]. Trusts and estates are not subject to the Washington capital gains tax because neither qualifies as an “individual” under the statute. “Individual” is defined at RCW 82.87.020 to mean “a natural person.”
The statute creating the Washington capital gains tax, like many tax laws, is not simple and direct because, once again like many tax laws, it includes multiple scenarios under which the tax does not apply. Here, the statute creating the Washington capital gains tax includes an annual deduction amount and a list of exemptions. In addition, the tax is only imposed on individuals who are natural persons. The Washington capital gains tax does not apply to trusts and estates because neither is included in the definition “individual” and therefore both trusts and estates fall outside the tax’s scope.
To learn more about Does a Trust or Estate Owe Washington Capital Gains Tax, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100
