Navigating the Waters of Washington State Capital Gains Excise Tax in Estate Planning

In the dynamic world of estate planning, Washington State’s Capital Gains Excise Tax has introduced a significant variable for residents with substantial assets. This tax, which imposes a 7% levy on certain capital gains, is particularly impactful for those with low-basis stock received as part of their compensation.

Current Indexed Amount and Indexing: The standard deduction for the Capital Gains Excise Tax in Washington has been indexed to $262,000 for the 2023 tax year. This adjustment for inflation is a critical measure that ensures the tax’s fairness over time.

Revised Example of a Taxpayer with Microsoft Stock: Let’s revisit Alex’s situation with a revised basis and number of shares. Originally, Alex received Microsoft stock at a very low basis as part of their compensation package. To illustrate the impact of the capital gains tax, let’s assume the following:

  • Alex’s original basis in the stock was $50 per share.
  • By 2024, the stock’s value has increased to $400 per share.
  • Alex decides to sell 3,000 shares, realizing a gain of $350 per share.

The total gain from this sale would be

  • 3,000 shares x $350 per share = $1,050,000

After applying the indexed exemption of $262,000, the taxable gain would be:

  • $1,050,000 – $262,000 = $788,000

At a 7% tax rate, Alex would owe a Washington capital gains tax of

  • 00.07×$788,000=$55,160

The Importance of Indexing: This example underscores the importance of indexing the exemption amount. Without it, taxpayers like Alex could face an even greater tax burden as their gains exceed the static exemption threshold.

The Capital Gains Excise Tax in Washington State presents new challenges for estate planning, especially for individuals with assets such as low-basis stock. Understanding the indexed exemption amount and its implications is essential for managing potential tax liabilities and making informed decisions about asset management.