The first tax return won’t be due until 2029. But if you’re affected by the new tax? You want to understand mechanically how it works now. The formula varies from the federal tax formula. And you do have some planning options.

How New Washington Millionaire’s Tax Works

At first glance, many people assume this state income tax works like a traditional income tax system—with brackets, marginal rates, and complexity layered on top. But that mental model misleads. A better way to understand the tax? This is a flat tax with a one-size-fits-all deduction.

Conceptually, the tax formula works like this:

Step 1: Start with a taxpayer’s federal adjusted gross income (AGI)
Step 2: Make a handful of Washington-specific adjustments
Step 3: Subtract a $1,000,000 deduction
Step 4: Tax any positive remainder at a 9.9% flat tax rate

Two quick notes: First, that $1,000,000 standard deduction is per household and adjusted for inflation every other year. Second, the $1,000,000 Washington deduction essentially replaces the federal tax return’s standard deduction or itemized deductions total.

A Quick Example of How New Flat Tax Works

Let’s look at a quick example in the case where a taxpayer earns $2,000,000 of income:
• AGI: $2,000,000
• Less deduction: $1,000,000
• Taxable amount: $1,000,000
• Tax: $99,000

That’s all straightforward. But this flat tax gets more complicated as you dig into the details.

Step 2 Is Where Things Get Interesting

As noted, the Washington state millionaire’s tax starts with federal AGI. (See that list of steps above.) But Washington does not simply adopt that number. Instead, the statute requires a series of adjustments (again, step 2 above) to create what it calls:

“Washington base income” and ultimately “Washington taxable income.”

These adjustments complicate the tax. (That is bad.) And they also create planning opportunities. (Which is good.)

Here are the key modifications in plain English.

1. Long-Term Capital Gains Are Adjusted (But Separately Taxed)

Washington removes federal long-term capital gains from AGI and then mostly adds back Washington capital gains taxed under its separate capital gains tax system.

Translation:
• Federal capital gains don’t flow through directly
• They’re re-measured and tweaked under Washington’s capital gains rules
This keeps the two tax systems coordinated and avoids double taxation. (This also affects the taxation of residential property and small business sales, as discussed later.)

2. Tax-Exempt State and Municipal Bond Interest Gets Added Back

The formula adds-back interest excluded from federal AGI (like out-of-state municipal bond interest).

Example: $200,000 municipal bond interest (federally tax-exempt) isn’t typically included in the federal AGI. However, that amount may still be taxable in Washington. Thus, the formula adds-back that interest.

This is a classic “state decoupling” move.

3. State Taxes Deducted Federally Get Added Back

If you deducted certain taxes in computing federal AGI, Washington adds them back.

The add-backs for taxes include state income taxes (if applicable), Washington B&O taxes and pass-through entity (PTE) tax payments.

The logic here? Washington prevents you from reducing its tax base using deductions tied to other taxes.

4. Pre-2028 Net Operating Losses Are Disallowed

Net operating losses (NOLs) from before January 1, 2028 are added back to the federal AGI and, thus, not allowed to reduce Washington income. Only post-2028 losses get partial recognition. This is a major “reset” feature in the statute.

5. Interest on U.S. Government Obligations Is Subtracted

The formula subtracts interest from U.S. Treasury bonds, federal notes and similar federal obligations from Washington income. This follows long-standing constitutional principles limiting state taxation of federal obligations.

6. Wagering Losses Get Partial Relief

Washington allows a deduction for wagering losses: Up to 90% of losses (limited to wagering income). This matches the federal rules for 2026 and future years.

7. Cannabis Businesses Get a Special Deduction

Normally, businesses don’t get to deduct the expenses of operating an illegal or criminal enterprise because of IRC §280E. Washington state cannabis businesses, for example, cannot deduct ordinary expenses on the federal income tax return.

Washington reverses that result, however. It makes those disallowed expenses deductible for Washington purposes. This is a significant taxpayer-friendly adjustment for that industry.

8. A Few Niche Adjustments (Most Taxpayers Won’t Encounter)

The statute also includes several specialized rules:
• Incomplete nongrantor trusts: income may be pulled back into the individual’s tax base
• Tribal income: certain income is exempt
• Capital construction funds (vessel industry): deposits may be deductible.

For most taxpayers, these won’t matter—but they reflect how comprehensive the statute is. (And point, I guess, to why you want a well-connected lobbyist.)

Credits Matter Too

The Millionaire’s tax provides credits, too. (A $1000 credit reduces the state income tax amount by $1000.)

For example, Washington state gives you credit for business and occupation taxes it already levied against business income it wants to tax again. It also gives you credit for any Washington state capital gains it wants to tax again. (In effect with these credits, you pay tax once on income. Not twice.)

Washington state also gives you credit for income taxes you’ve paid other states. In the case where, for example, you’ve already paid another state (Arizona) income taxes on a $1,000,000 chunk of business income? Washington lets you reduce the amount of Washington state millionaires tax you owe on that same $1,000,000 for the other state’s (Arizona’s) taxes you’ve already paid.

Non-resident Millionaires Earning Income in Washington State Get Taxed

Non-resident millionaires with Washington state income get taxed too. And the flat tax works proportionally.

For example, a resident earning $2,000,000 AGI would pay about $99,000 in millionaires’ tax. (This is the example we used above.)

However, a nonresident earning $2 million total—two-thirds outside Washington and one-third inside—would pay roughly $33,000 of Washington millionaire’s tax, because both the income and the $1,000,000 deduction are prorated based on the share of income earned in Washington.

Note that the $33,000 is one third of the $99,000 millionaire’s tax a resident would pay.

Two Final Qualifications

The statute’s preamble suggests that sales of residential real estate and qualified family-owned businesses won’t be taxed—and importantly, that treatment does appear in the operative law.

But the mechanism is indirect: Washington removes federal long-term capital gains from income and then adds back only “Washington capital gains,” as defined under the state’s existing capital gains tax. Because that system already excludes real estate and provides a deduction for qualified family-owned businesses, those exclusions effectively carry over into the new millionaire’s tax. The result is that, while not stated in a single clean sentence in the statute, the intended treatment is largely implemented through cross-reference.

Other Resources

Washington State Millionaires’ Tax Residency Rules
Changing Your Washington State Residency
Qualified Family-Owned Business Deduction

The post The New Washington Millionaires Tax appeared first on Evergreen Small Business.

In effect—and this is intentionally a rough description—a resident pays the millionaires’ tax on their Washington taxable income in excess of $1,000,000. (The actual law as currently proposed is significantly more complicated; this description is only meant to orient the reader.)

A Term to Know Before You Look at Residency Rules

Before looking at the residency rules, you need to understand one term: domicile.

Domicile means the primary place you live and intend to live. If you work in Washington state, rent or own a home you live in, plug into the local community here, have children in school here, and generally organize your life around Washington, you are likely domiciled in Washington state. If you always plan to return to Washington state, you are likely domiciled in Washington state.

If you spend time in Washington state and also spend time in another state (for example, Florida or Arizona), your domicile is generally the state where you have the deepest roots and strongest connections. This determination is inherently fuzzy and fact‑specific. (Hopefully, the legislature will provide a clearer definition in the final bill.)

Here is the key takeaway: If you are domiciled in Washington state, you will usually pay the millionaires’ income tax. But domicile alone does not determine whether you pay the tax. The statute separately defines who is treated as a resident for millionaires‑tax purposes, and those residency rules can override domicile in limited circumstances.

The 30‑Day Residency Rule

The first residency concept to understand is the so‑called “30‑day rule.” The proposed statute provides that a “resident” includes an individual:

(i) Who is domiciled in this state during the taxable year, unless the individual (A) maintained no permanent place of abode in this state during the entire taxable year, (B) maintained a permanent place of abode outside of this state during the entire taxable year, and (C) spent in the aggregate not more than 30 days of the taxable year in this state.

This provision is easy to misread. The 30‑day rule is not what makes someone a resident. It is an exception that allows a Washington domiciliary to avoid being treated as a resident—but only if all three conditions are satisfied for the entire year.

Under this rule, even if you are domiciled in Washington state, you are not treated as a resident for millionaires‑tax purposes if:

• You did not maintain any permanent place of abode in Washington state at any point during the taxable year;
• You did maintain a permanent place of abode outside Washington state for the entire taxable year; and
• You were physically present in Washington state for 30 days or less during the year.

Think of this as a narrow “de minimis presence” exception. If you truly live somewhere else, have no place to live in Washington, and are only in the state briefly, the statute treats you as a nonresident—even if domicile might otherwise be arguable.

Important note: Nonresidents may still be subject to the millionaires’ tax on Washington‑source income. For example, a high‑income California resident who owns rental property located in Washington or an interest in a pass‑through business operating in Washington may owe millionaires’ tax on that Washington‑source income. But they would not be taxed on all of their income.

The 183‑Day Residency Rule

For individuals who are not domiciled in Washington state, a different residency rule applies: the 183‑day rule. The statute provides that a resident also includes an individual:

(ii) Who is not domiciled in this state during the taxable year, but maintained a place of abode and was physically present in this state for more than 183 days during the taxable year.

This rule generally targets seasonal or extended‑stay visitors. If someone is not domiciled in Washington but maintains a place of abode here and spends more than half the year in the state, the statute treats them as a resident for millionaires‑tax purposes.

Both elements matter. Physical presence alone is not enough. The individual must also maintain a place of abode in Washington during the year.

Clarification #1: Partial Days Count as Full Days

The statute includes an important clarification regarding day counting:

For purposes of this subsection, “day” means a calendar day or any portion of a calendar day.

This means partial days count as full days when applying both the 30‑day rule and the 183‑day rule. Days can add up faster than many people expect. For example, entering Washington late on a Friday and leaving early Monday morning can count as four days, even if you were physically present for less than 48 hours.

Clarification #2: Partial‑Year Residency

The statute also addresses how residency applies when a person is classified as a resident for only part of the year. It provides:

An individual who is a resident under subsection (a) is a resident for that portion of the taxable year in which the individual was domiciled in this state or maintained a place of abode in this state.

This rule does not change who is a resident. Instead, it limits how much of the year is treated as resident once residency is established.

For example:

• If a Washington domiciliary fails the 30‑day exception (for example, by spending more than 30 days in the state), the individual is treated as a resident only for the portion of the year during which they were domiciled in Washington or maintained a Washington place of abode.

• If a non‑domiciliary is classified as a resident under the 183‑day rule, they are treated as a resident only for the portion of the year during which they maintained a Washington place of abode.

This partial‑year rule provides a measure of fairness by preventing the statute from automatically treating someone as a resident for an entire year when their connection to Washington exists only for part of that year.

Additional Resources

Changing Your Washington State Residency or Domicile

Text of Proposed Washington State Income Tax Bill (as of February 10, 2026)

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