Washington's new 2028 income tax seems to have a ~$27K cliff hidden in the capital gains rules. Am I reading this right?
I was working through ESSB 6346 (WA's 9.9% tax on income over $1M, starting 2028) and I think I found a strange edge case. Please check my reading.
- WA already has a capital gains tax: 0% on the first ~$278k of long-term gains, 7% above that, 9.9% over $1M of gains.
- The new income tax is 9.9% on income over $1M (federal AGI, with tweaks).
- To avoid double taxing gains, the bill first removes all long-term gains from your income, then adds back the WA-taxed gain plus the $278k deduction. See section 302(3) here: https://lawfilesext.leg.wa.gov/biennium/2025-26/Htm/Bills/Session%20Laws/Senate/6346-S.SL.htm
Here is the problem I see. The bill says the add-back "applies only to taxpayers owing tax under chapter 82.87 RCW" (the capital gains tax). So:
- Gain under ~$278k: you owe no capital gains tax, nothing gets added back, so the gain never touches the income tax.
- Gain even $1 over: you owe capital gains tax, so the *whole* gain gets added back, including the first $278k that was previously free.
Example (single filer, $1.2M wages, 2025 deduction figure):
Scenario 1
- Long-term gain: $277,000
- Capital gains tax: $0
- Income tax base: $1,200,000
- Total WA tax: $19,800
Scenario 2
- Long-term gain: $279,000
- Capital gains tax: $70
- Income tax base: $1,479,000
- Total WA tax: $47,421
A $2,000 bigger gain costs about $27,600 more in tax, because 9.9% x $279,000 of extra income suddenly counts. It only affects people whose other income is already over $1M.
Caveats: I'm not a tax pro, this ignores the other credits in the bill, and the tax faces a repeal vote in Nov 2026. I found this while building the rules into a planning calculator, and I checked the wording against the session law text rather than a summary.
Does this match how you read Sec. 302(3)?