Does Washington State Have an Income Tax?
While Washington lacks a general income tax, residents face a distinct mix of other state taxes and must still fulfill their federal tax obligations.
Washington is one of the few states that does not impose a general personal or corporate income tax on its residents or businesses. This means that for most individuals, wages, salaries, and other forms of ordinary income are not subject to a state-level tax.
The Washington Capital Gains Tax
While Washington forgoes a general income tax, it does levy a specific tax on certain investment profits. A 7% tax is applied to the sale or exchange of long-term capital assets, such as stocks and bonds, held for more than one year.
A significant standard deduction applies, which for 2024 is $270,000 per individual or married couple. This means the tax is only assessed on the amount of long-term capital gains that exceeds this threshold in a given year. Beginning January 1, 2025, gains exceeding $1 million will be subject to a higher rate of 9.9%.
Several major asset classes are explicitly exempt from the capital gains tax. The most notable exemption is for the sale or exchange of real estate. Additionally, assets held within retirement accounts, interests in certain qualified family-owned small businesses, timber and timberlands, and certain agricultural assets like livestock are also exempt from this tax.
Major State and Local Taxes in Washington
A primary source of revenue is the state sales and use tax. The statewide rate is 6.5%, but local jurisdictions add their own sales taxes, leading to combined rates that are among the highest in the nation. This tax is applied to the retail sale of most goods and some services.
Property taxes are another component of the state’s revenue system, collected at the local level. These taxes are assessed on the value of real property, such as homes and land. The effective property tax rates in Washington are generally considered to be near the national average.
Washington also imposes a Business and Occupation (B&O) tax on companies operating within the state. The B&O tax is not a corporate income tax; instead, it is a gross receipts tax, calculated on the total revenue of a business. The specific B&O tax rate varies depending on the industry classification of the business.
Federal Tax Obligations for Washington Residents
The absence of a state income tax has no bearing on a resident’s obligations to the federal government. All Washington residents must continue to pay federal income tax to the Internal Revenue Service (IRS). This means individuals who meet the minimum income thresholds for filing are required to submit a federal tax return each year.