June 1, 2025
5/20/2025: Washington State Tax Changes
5/20/2025: Washington State Tax Changes Affecting Businesses & Individuals
On May 20, 2025, Governor Bob Ferguson signed into law several significant tax measures impacting both businesses and individuals. These reforms are designed to help close a projected multi-billion-dollar budget shortfall. The key provisions include:
Capital Gains Tax (SB 5813)
- A new higher tax rate tier has been introduced. For tax year 2025 and beyond, long-term capital gains exceeding $1 million will be taxed at 9.9%, while gains between $250,000 and $1 million remain subject to the existing 7% rate. The tax continues to apply only to individuals, not corporations or trusts, and existing exemptions (such as for real estate and retirement accounts) remain in place.
- For more details, see our article: Washington Capital Gains Tax: A Holistic Tax Strategy Approach
Business & Occupation (B&O) Tax (HB 2081)
- The B&O tax rate for manufacturing, wholesaling, and retailing will increase to 0.5% starting in 2027.
- For service businesses, a new tiered structure applies to businesses with over $5 million in annual revenue will be taxed at 2.1% (up from 1.75%) beginning October 2025.
- Additional surcharges have been introduced for large businesses, including a 0.5% surcharge on taxable income over $250 million (2026–2029), an increased surcharge for financial institutions, and a substantial increase for advanced computing businesses.
Estate Tax (SB 5813)
- The estate tax exclusion threshold will increase from $2.193 million to $3 million for individuals who die after July 1, 2025, with future inflation adjustments.
- The estate tax rate schedule is now more progressive, ranging from 10% to 35% (previously capped at 20%), depending on the size of the taxable estate.
| Taxable Estate Amount | Current Tax Rate | New Tax Rate (Starting July 1, 2025) |
|---|---|---|
| Up to $1 million | 10% | 10% |
| $1 – $2 million | 14% | 15% |
| $2 – $3 million | 15% | 17% |
| $3 – $4 million | 16% | 19% |
| $4 – $6 million | 18% | 23% |
| $6 – $7 million | 19% | 26% |
| $7 – $9 million | 19.5% | 30% |
| Over $9 million | 20% | 35% |
Sales Tax Expansion (SB 5814)
- Effective October 2025, the state sales tax will apply to a broader range of services, including IT support, data-processing, custom website development, certain security and staffing services, and advertising. There are exemptions for transactions between affiliated group members.
Elimination of Certain Tax Preferences (SB 5794)
- Several tax breaks have been eliminated, including the B&O deduction for qualifying financial businesses on interest income from residential mortgages and tax preferences for sales of precious metals and bullion.
Local Property Tax Levies (HB 2049)
- Legislation now allows for higher annual increases in local property tax levies that fund schools.
Other Notable Changes
- A new excise tax will apply to the banking and sale of surplus zero-emission vehicle credits by manufacturers.
- The state has also approved a transportation revenue package, including a 6-cent increase in the state gas tax.
Political and Legal Context
- These changes were enacted to address budget shortfalls and fund public services. Notably, a proposed wealth tax was not included in the final package. The capital gains tax remains subject to ongoing legal and political debate, with a potential repeal initiative on the ballot in November 2025.
Comprehensive Planning Considerations
To successfully navigate the changes to Washington’s tax structure, consulting a tax professional is highly recommended. For support with your tax planning strategy, please contact your dedicated GO advisor for tailored guidance.