In a quite remarkable turn of events, on March 24, 2023 the Washington State Supreme Court upheld the constitutionality of a state long-term capital gains tax – a win long sought by progressive tax policy advocates.
If you reside in Washington State, take note. If you are outside WA, please share with friends and relatives who live here – and, be aware that this outcome may prompt other states to follow suit.
Below is a synopsis received from our CPA firm, R.D. Barnett PLLC, that we thought worth sharing, posted here with permission.
Washington State Supreme Court Upholds Constitutionality of the Long-Term Capital Gains Tax
In what we think is a surprising outcome, we are writing from the depths of busy season to inform you about a development in Washington State tax law. The Washington State Supreme Court has recently voted to uphold the constitutionality of the state’s long-term capital gains (LTCG) tax, which was passed by the state legislature in 2021 under SB 5096 and is effective as of January 1, 2022. Washington residents and nonresidents with respect to certain transactions occurring within the state will be affected. This law had been challenged and ruled unconstitutional by a Douglas County Superior Court judge last year and went to the Washington State Supreme Court earlier this year.
The tax applies a 7% tax on the LTCGs reported on your Federal tax return, however, the tax only applies to LTCGs over $250,000. As such, the Department of Revenue will be collecting the tax which is due April 18, 2023.
There are exceptions to this rule such as retirement accounts, real estate, farms, and forestry which are all exempt from the tax. Small business owners may also be exempt from the tax if they are regularly involved in running the business for five of the previous 10 years before they sell, own it for at least five years, and gross $10 million or less a year before the sale. As always, these exceptions come down to your specific facts and circumstances and they will need to be well-documented to uphold the exception.
Things to Note
This tax does apply to LTCGs passed through from entities such as S-Corporations, partnerships, and certain trusts.
If you have obtained an extension for filing the federal income tax return, you are entitled to the same extension of time for filing the return required if you provide the Washington Department of Revenue, before the due date, the extension confirmation number, or other satisfactory evidence confirming the federal extension. Keep in mind just like Federal filings, an extension does not extend the 4/18/2023 due date for paying the tax due.
With many unanswered questions, we believe that this decision will have significant implications for the tax landscape in Washington State and we will continue to monitor any updates that may affect R.D. Barnett clients both for 2022 and for future planning items.
If you have any questions or concerns about how this may impact your tax or financial situation, please do not hesitate to contact the R.D. Barnett office at firstname.lastname@example.org or call at (206) 347-8000.
R.D. Barnett PLLC
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