Washington Tax Changes: Key Strategies to Consider
Washington’s latest legislative session recently concluded, with Governor Ferguson signing several bills into law. Among these were substantial increases to Washington state’s taxes, which could impact Badgley clients.
The Washington estate tax rate will climb by an average of 6 points across all tax brackets. For high earners, capital gains taxes will also increase by about 3 points. However, sophisticated tax strategies may allow individuals to partially or fully offset these higher rates.
In this article, we’ll review the recent changes to Washington state’s taxes and look at how financial planning can help minimize your tax burden. Please note that Badgley Phelps does not offer tax advice. However, we are proud to work closely with your tax attorney and CPA to develop a tax-aware wealth strategy.
Washington State’s Taxes: What Changed?
Washington’s estate tax saw the most significant changes following the new legislation. In July, Washington’s estate exemption for individuals will increase from $2.193 million to $3 million, with annual inflation adjustments moving forward. While this change should provide relief to moderately sized estates, the law also came with substantial tax increases for larger estates.
Washington’s top marginal estate tax rate will increase 15 points to 35%. This rate will apply to taxable estate values exceeding $9 million, making Washington the state with the highest estate tax rate in the country.[1] The new law also increases marginal rates at lower levels, with rates rising by an average of roughly 6 points across all brackets. However, these rates need to be considered alongside the higher exemption amount, with many gross estates in the $3 million to $8 million range potentially seeing an overall tax reduction.
In addition to these estate tax changes, Washington’s long-term capital gains rate of 7% is set to rise. Annual capital gains over $1 million (after the exemption limit) will be charged an additional 2.9% points, bringing the top marginal rate to 9.9%. This increase is retroactive to the start of the year, meaning individuals who have already accumulated large gains may wish to review their tax plan.
Estate Tax Strategies: Gifting & Trusts
Washington’s recent tax changes make it even more important to create a tax-aware estate plan. When combined with federal taxes, the highest total estate tax rate for Washington residents could approach 61%.[2] Minimizing your estate tax burden generally involves removing assets from your estate to benefit from exemption limits and lower marginal rates.
One of the most effective ways to reduce the value of your taxable estate is to utilize lifetime gifting strategies. Following the signing of the ‘Big Beautiful Bill,’ the federal combined gift and estate tax exemption is set at $15 million for individuals, with inflation adjustments moving forward.[3] Amounts under this lifetime limit can generally be gifted tax-free.
At the federal level, there is typically little difference between gifting assets during life and leaving them as part of an estate, as both are generally subject to the same exemption. Like many states, however, Washington has no gift tax. This means that lifetime gifting can significantly reduce your estate tax at the state level. Moving assets like real estate into an LLC can also be beneficial, as gifting privately held shares often comes with valuation discounts.
Another key strategy involves lowering an estate’s taxable value by moving assets into an irrevocable trust. Depending on your situation, tools like a Spousal Lifetime Access Trust (SLAT), a Grantor Retained Annuity Trust (GRAT), or a Generation-Skipping Trust (GST) can be appropriate. Once again, while moving assets into a trust may reduce your federal estate tax exemption, this strategy can substantially reduce your estate’s state tax obligation.
Finally, individuals with philanthropic goals can reduce their taxable estate through charitable giving. Options like a Charitable Remainder Trust (CRT) or Donor-Advised Fund (DAF) can help minimize your estate tax burden while offering immediate tax benefits. Gifting assets at passing can also lower your taxable estate while allowing you to retain control of those assets throughout your life.
Capital Gains Tax Strategies: Timing & Asset Carve-Outs
At Badgley, our tax-aware portfolio management can help reduce investment taxes across the board. Tax-loss harvesting, investing in tax-advantaged assets, and strategically using tax-qualified accounts can be beneficial at both the state and federal levels. For Washington residents, several targeted strategies are also worth considering.
While Washington charges capital gains taxes, no taxes are due on gains below a set exemption amount. As of 2024, this amount was $270,000, with 2025’s exemption yet to be announced. Due to this exemption limit, breaking up asset sales over multiple years can potentially help avoid capital gains taxes entirely.
For example, while accumulating $500,000 in gains in one year would trigger Washington capital gains taxes, spreading those sales over two years would not (under 2024’s limit). Moreover, the recent changes also set a top marginal capital gains rate of 9.9% in Washington. Even if you’re unable to escape capital gains taxes entirely, timing asset sales may help ensure that you avoid this higher rate.
Washington also offers a tax carve-out for particular assets. Notably, no capital gains taxes are owed on real estate sales, nor on indirect real estate sales through a privately owned entity. Gains from the sale of all or substantially all of a qualified family-owned business can also be deducted.
As with estate taxes, charitable giving can also help offset capital gains taxes. For the 2024 tax year, Washington allows individuals to deduct charitable gifts above $270,000 from their capital gains, up to a total deduction limit of $108,000. For individuals already planning large charitable contributions, reducing state capital gains tax can be an added bonus.
Conclusion: Tracking Tax Changes
For investors looking to keep more of their hard-earned wealth, intelligent tax planning is key to a comprehensive financial strategy. As the tax burden on Washington residents increases, this planning is only becoming more important. At Badgley Phelps, we work in close coordination with a client’s professional team to optimize their tax situation.
In terms of estate planning, both lifetime gifting and irrevocable trusts can help lower the value of your estate subject to Washington taxes. Similarly, timing asset sales and strategically choosing which assets to liquidate can help avoid Washington capital gains taxes. For individuals with philanthropic goals, charitable giving can potentially help minimize taxes in both categories.
As the tax environment evolves, the Badgley Phelps team continues to track the latest developments, especially with federal changes on the horizon. Curious to learn how Badgley incorporates tax considerations into our financial planning process? We invite you to contact us by phone or email.
[1] Tax Foundation, Estate and Inheritance Taxes by State, 2024
[2] Scarff Law Firm, Washington Tax Alert Memo May 27 2025
[3] Anchin, Block & Anchin, The Big Beautiful Bill Becomes Law: What It Means for Businesses and High-Net-Worth Individuals