Navigating Washington’s New Tax Landscape: Capital Gains, Estate, and Business Impacts

Washington State has enacted significant changes to its capital gains and estate tax laws as part of an effort to address a $16 billion budget shortfall. Beginning in 2025, individuals and businesses will face new rates and broader tax exposure. These changes include:

• An increase in the capital gains tax rate
• A higher estate tax exemption with adjusted rates
• New sales tax requirements for many service-based industries
• Adjustments to the Business & Occupation (B&O) tax structure

These updates may affect how residents structure asset sales, estate planning, and business operations. Proactive planning is essential to manage this evolving tax landscape.

Below is a summary of the key updates and their potential impact.

What Is Changing with the Washington State Capital Gains Tax?

• Effective Date: Retroactively applied to January 1, 2025
• Previous Law: Capital gains above a $270,000 exemption were taxed at 7.0%
• New Law: Gains exceeding $1 million above the exemption are now taxed at an additional 2.9%, for a total top rate of 9.9%

How Is Washington Estate Tax Changing?

• Effective Date: Applies to estates of individuals who pass away on or after July 1, 2025

Key Updates:

• The estate tax exemption increases from $2.193 million to $3 million
• Beginning in 2026, the exemption will be indexed to inflation
• Estate tax rates will also rise to help fund the budget deficit

Note: This change may offer relief to some heirs, but the higher rates could offset some benefits.

How Much Can You Inherit Without Paying Estate Tax in Washington?

Beginning July 1, 2025, the Washington estate tax exemption will be $3 million. Estates valued below that amount are exempt from state estate tax. Federal estate tax exemptions remain significantly higher, so Washington residents should consider both thresholds in estate planning.

What Businesses Need to Know About B&O and Sales Tax Changes

Business & Occupation (B&O) Tax Updates

• General B&O Rate: Increases to 0.5% for most industries (effective January 1, 2027)
• Service Businesses (gross income > $5 million): Rate increases from 1.75% to 2.1% (effective October 1, 2025)
• High-Income Surcharge: Applies to businesses with income over $250 million (effective January 1, 2026)
• Investment Income: Taxable unless it constitutes less than 5% of gross receipts

Expanded Sales Tax Requirements

Starting October 1, 2025, sales tax will apply to many professional services, including:

• Custom website development
• Custom software and software customization
• Temporary staffing services
• Advertising services
• Live presentations (seminars, performances)
• Digital delivery methods (e.g., email, portals, video conferencing)
• Businesses providing these services must prepare to collect and remit sales tax.

Is investment income subject to B&O tax?

A new Washington Supreme Court decision that may impact your tax obligations. In Antio, LLC v. Department of Revenue (2024), the Court ruled that income derived from core investment activities is subject to B&O tax.  Income earned from investments includes interest, dividends, rentals, etc.   The only exception is “incidental investments of surplus funds,” meaning only investment income under 5% of the total income.

Next Steps: Plan Ahead with Confidence

The latest changes to Washington's tax laws mark a pivotal moment for individuals, families, and businesses. Strategies such as trust restructuring, asset relocation, or timing the sale of appreciated assets may help reduce your state-level burden.

These developments are a reminder of how quickly tax environments can shift—and why proactive, relationship-centered planning is more important than ever. VSH is here to help you navigate these complexities with clarity and confidence.

Contact us to review how these changes affect your financial plans and to explore strategies tailored to your goals.