13 April 2026 Washington to implement individual income tax regime beginning in 2028, featuring $1 million standard deduction
On March 30, 2026, Washington Governor Bob Ferguson signed into law SB 6346, which imposes a new income tax on individuals beginning in 2028. With a $1 million standard deduction, the tax is effectively imposed only on millionaires. Revenue generated from this new tax will pay for sales and use tax and business and occupation (B&O) tax relief, which is discussed in Tax Alert 2026-0853, and provide additional revenue for education and social programs. This Tax Alert focuses on the new income tax as well as a new elective Washington pass-through entity tax (PTET). Historically Washington State has not had an individual income tax. Beginning January 1, 2028, Washington will impose an income tax on individuals "on the receipt of Washington taxable income." The tax equals 9.90% multiplied by an individual's Washington taxable income (i.e., the taxpayer's Washington base income with modifications). Washington base income is calculated as an individual's federal adjusted gross income (FAGI) with modifications for:
A modification is not required if it has the effect of duplicating an item of income or deduction. Items excluded from FAGI are also excluded from the Washington income tax, unless specifically included. In addition, Tribal treaty income is exempt from the calculation. In computing Washington taxable income, taxpayers begin with their Washington base income with several adjustments. These adjustments include a standard deduction of $1 million per individual or per household in the case of a spouse or domestic partner (regardless of whether they file joint or separate returns); a deduction for charitable contributions to a qualified organization, capped at $100,000 per household; and an add back for the distributive share of tax expenses incurred by a pass-through entity (PTE) that elects to pay the PTET to the extent it has been deducted in calculating the taxpayer's FAGI. Further adjustments include required additions and permitted deductions tied to specific activities and income types. Taxpayers must add back their distributive share of tax expenses incurred by a pass-through entity that elects to pay the PTET, to the extent those expenses were deducted in computing FAGI. Taxpayers also must deduct an amount equal to 90% of Washington-allocated wagering losses for the tax year. Additional permitted deductions include commercial cannabis expenditures disallowed for federal purposes under IRC Section 280E, income derived from obligations of the United States to the extent federal law prohibits state taxation (net of any related expenses deducted for federal purposes), and income connected to federally recognized tribes, including treaty-protected income. A nonrefundable credit is allowed for income tax paid by a resident individual, or by a PTE owned by the individual, to another state or a political subdivision of another state on income that is also subject to Washington's income tax. Individuals may claim a nonrefundable credit for several categories of taxes, including the amount of Washington B&O tax or public utility tax paid for income also subject to income tax, the amount of Washington capital gains tax imposed for the same tax year, and income tax paid to another state or jurisdiction on income that is also included in Washington base income, limited to the smaller of (i) the amount of tax paid to the other jurisdiction; or (ii) the amount of WA-equivalent tax on the double-taxed income. The amount of these credits claimed may not exceed income tax otherwise due. Unused credits cannot be carried forward or backward. A Washington resident is defined as an individual who meets either a domicile-based test or a statutory presence test during the tax year. Under the statutory presence test, an individual who is not domiciled in Washington is nevertheless treated as a resident if they maintain a place of abode in Washington and are physically present in the state for more than 183 days during the year. Resident individuals must allocate all income to Washington. An individual who qualifies as a resident for only a portion of the tax year (for example, due to a change in domicile or physical presence) is treated as a resident for that portion of the year. Income is then prorated between resident and nonresident periods under the income tax's allocation and apportionment provisions. Nonresident individuals will allocate income derived from Washington sources to the state. Such income includes:
A nonresident will not have to allocate income to Washington if they performed services in the state for five or fewer days in the calendar year. This exclusion does not apply to nonresident professional athletes, student athletes and entertainers. The law provides rules for apportioning and allocating nonresident income from business activities conducted in Washington that generally follow the Uniform Division of Income for Tax Purposes Act (UDITPA). These rules apply to a nonresident's income derived from or connected with a business, trade or profession carried on in Washington (hereafter, business activity), including a sole proprietorship and any distributive share of a PTE from such business activity. Receipts from the sale of tangible personal property are in the state if the property is delivered or shipped to a purchaser in the state. A throwback rule applies to receipts from tangible personal property where the property is shipped from an office, store, warehouse, factory or other place of storage in Washington and the purchaser is the US government or the taxpayer is not taxable in the state of purchase. Market-based sourcing rules apply to receipts from sales of non-tangible personal property (e.g., intangible property, services, real property). The law includes alternative apportionment provisions that the taxpayer may petition to use, or the Washington Department of Revenue may require be used, when the allocation and apportionment provisions do not fairly represent the taxpayer's business activity in the state.
Allocation and apportionment of nonresident income — compensation, professional and student athletes When a nonresident performs services both within and outside the state, compensation is apportioned based on the ratio of days worked in the state to total days worked, or by another approved reasonable method. The law includes specific rules for apportioning income for nonresident members of a professional athletic team and nonresident student athlete income. Beginning January 1, 2028, PTEs (i.e., a partnership, limited liability company, or S corporation) may elect to pay a 9.90% PTET. The PTET election is made annually by filing an election with the Washington Department of Revenue by the due date prescribed by the Department, which by statute cannot be later than June 15 of the tax year. Once made, the election is irrevocable for the tax year. Owners may opt out of PTET participation, and the PTET election may exclude owners who choose not to participate. However, the PTE must list the participating and nonparticipating owners at the time the PTE elects into the PTET for the tax year. The taxable income of an electing PTE is: (i) the entire distributive share of income, gain, loss and deduction attributable to participating resident owners, regardless of source; and (ii) the state source distributive share of income, gain, loss and deduction attributable to participating nonresident owners. Taxable income also includes guaranteed payments, separately stated items and investment income to the extent such items would be included in a participating owner's individual Washington base income. Notably, the taxable income for an electing PTE is not determined by whether an owner is subject to the newly enacted income tax, but rather by whether the owner is a participating resident or nonresident owner (as previously mentioned) or whether the owner is nonparticipating (in which case, that owner's share of income is excluded). Participating owners of an electing PTE include their distributive share of income from the PTE to determine their Washington base income subject to the newly enacted income tax. However, participating owners are also allowed a non-refundable credit against that income tax for their proportionate share of PTET paid by the PTE. Unused credits may be carried forward or backward and applied to another tax year. The new law includes other provisions on the administration of the new income tax, including estimated payment requirements for individuals and PTEs subject to the PTET, tax return filing requirements, requirement for joint and separate returns, applicable penalties and interest, refunds, estimation of business and nonbusiness income agreements, as well as guidance on prorating income of a part-year resident. Washington's newly enacted income tax applies alongside existing state taxes, such as the gross receipts tax and the capital gains tax, resulting in an increasingly complex state tax landscape. As currently written, the income tax may produce effective Washington tax rates that exceed the stated 9.9% rate in certain circumstances. The interaction of these tax regimes may, in some cases, lead to outcomes that vary significantly depending on a taxpayer's facts and circumstances. As a result, several considerations may be relevant, including an evaluation of Washington residency and domicile, the determination of whether sales are attributable to Washington under the state's sourcing rules, consideration of potential restructuring alternatives and assessment of whether the Washington PTET election may apply. A lawsuit challenging Washington's newly enacted income tax was filed on April 9, 2026. The plaintiffs are seeking a declaratory judgment that the new income tax is "unlawful and invalid" in violation of Washington Constitution Art. VII, section 1 as a tax imposed at non-uniform rates on property, and Art. VII, section 2 as a tax on personal property that exceeds the 1% limit.1 The new income tax also faces referendum efforts. Despite this uncertainty, taxpayers should review the law and consider assessing potential exposure if it is implemented as scheduled, from both compliance and advisory perspectives. Washington is the latest state to enact an elective PTET. Entities and their owners will want to review the new tax and consider whether making the PTET election is worthwhile. Given the PTET election will be due no later than June 15 of the tax year for which the PTET election is made, individual owners may also want to consider whether they are likely to be subject to the new individual income tax for a given tax year before making the election. EY will closely monitor additional regulatory and administrative guidance and provide meaningful updates as new guidance is released.
Document ID: 2026-0852 | ||||||||
