Washington has no state income tax on wages or salaries

Washington is one of nine states with no tax on earned income. If you work in Washington or live there and earn a paycheck, you do not owe state income tax on those wages. This applies whether you are an employee, self-employed, or a business owner taking a draw.

However, Washington does tax certain types of investment income and has other state taxes that affect your overall tax picture. Understanding what is and is not taxed in Washington matters if you are deciding where to live, how to structure retirement withdrawals, or how to report income you earn there.

Key Takeaways

  • Washington taxes capital gains on the sale of stocks, bonds, and other investments above a $250,000 annual threshold per person, at a flat 7 percent rate.
  • Wages, salaries, self-employment income, and retirement account withdrawals are not subject to Washington state income tax.
  • Washington funds state services through sales tax (currently 6.5 percent statewide, higher in some counties), property tax, and business taxes instead.
  • If you move to Washington from a state with income tax, you may owe tax to your former state on income earned there before you left.
  • Retirees drawing from IRAs, 401(k)s, or pensions owe no Washington state tax on those distributions, which can make the state attractive for retirement planning.

The capital gains tax and how it works

In 2022, Washington introduced a tax on long-term capital gains. This tax applies to the sale of stocks, bonds, mutual funds, real estate (other than your primary home), and other investment assets. The tax rate is a flat 7 percent on gains above $250,000 per person per year.

The $250,000 threshold means you only pay tax on gains that exceed that amount in a single calendar year. If you sell investments for a $150,000 gain in one year, you owe nothing. If you sell for a $400,000 gain, you owe 7 percent on the $150,000 above the threshold—roughly $10,500.

This tax applies to Washington residents on gains from any investment, regardless of where the asset is located. It also applies to non-residents on gains from Washington property. If you are subject to federal capital gains tax, you will also owe Washington's tax on the same gains, unless you may have access to for an exemption.

What Washington does not tax

Washington does not tax ordinary income from work. Your W-2 wages, 1099 self-employment income, and business profits are not subject to state income tax. This is true even if you earn a very high income.

Retirement account distributions are also not taxed by Washington. Money you withdraw from a traditional IRA, Roth IRA, 401(k), 403(b), pension, or annuity is not subject to state income tax. This applies to both the contributions you made and the earnings that accumulated inside the account.

Social Security benefits, unemployment benefits, and interest income are also free from Washington state income tax. Dividends from stocks and mutual funds are not taxed unless they are part of a capital gain that exceeds the $250,000 threshold.

How Washington funds state services instead

Without income tax, Washington relies on sales tax as its primary revenue source. The statewide sales tax rate is 6.5 percent, but most counties add a local portion, bringing the total to between 8.1 and 10.25 percent depending on where you shop. This makes Washington's sales tax among the highest in the nation.

Washington also collects property tax, which varies by county and is used primarily for schools and local services. The state does not have a statewide property tax, but county assessors set rates based on local needs.

The state also taxes businesses through a capital gains tax on business sales, a business and occupation (B&O) tax on gross revenue in certain industries, and other levies. These taxes are built into the cost of doing business and often passed along to consumers.

Moving to Washington from another state

If you move to Washington from a state with income tax, you may still owe tax to your former state on income you earned there before you moved. Most states tax residents on income earned within the state during the tax year, regardless of when you leave.

For example, if you worked in California from January through June and then moved to Washington, California will tax you on the income you earned during those six months. You will file a part-year resident return in California and a Washington return (if required) for the remainder of the year.

You will not owe Washington state income tax on that California income. However, you may owe Washington capital gains tax if you sold investments while a Washington resident, even if you earned the income in another state.

Tax planning for retirees and high earners

Washington's lack of income tax makes it attractive for retirees who draw from IRAs and pensions. If your retirement income comes primarily from these sources, you will owe no state income tax in Washington, even if you earned a high income during your working years.

For high earners, the capital gains tax becomes relevant. If you sell a business, real estate, or a large investment portfolio, you may owe the 7 percent tax on gains above $250,000. This is lower than the federal capital gains rate (which can reach 20 percent plus the 3.8 percent net investment income tax), but it is still a cost to factor into the timing of a sale.

Some people use the $250,000 threshold strategically by spreading large sales across multiple years. If you have a $500,000 gain, selling $250,000 in one year and $250,000 in the next year means you owe tax only on the second year's gain. This requires careful planning with a tax professional, especially if the sale is tied to a business or real estate transaction.

Frequently Asked Questions

Do I owe Washington capital gains tax if I sell my primary home?

No. Washington excludes the sale of your primary residence from the capital gains tax, regardless of how much profit you make. You must have owned and lived in the home as your principal residence for at least two of the five years before the sale. If you own a second home or investment property, gains from its sale are subject to the tax.

What if I work in Washington but live in another state?

You will not owe Washington state income tax on your wages, because Washington has no income tax. However, your home state may tax you on that income if you are a resident there. You may be able to claim a credit for taxes paid to Washington on your home state return, though Washington's lack of income tax means there is nothing to credit.

Does Washington tax retirement account withdrawals differently than other income?

No. Washington does not tax any form of ordinary income, including retirement distributions. Whether you withdraw from a traditional IRA, Roth IRA, 401(k), or pension, the distribution is not subject to Washington state income tax. This is true even if the withdrawal is treated as ordinary income on your federal return.

If I inherit money or investments in Washington, do I owe state tax?

Washington has no inheritance tax or estate tax. You do not owe state tax on money or property you inherit. However, if you later sell inherited investments and the gain exceeds $250,000 in a single year, you will owe the capital gains tax on the amount above that threshold.

How do I report Washington capital gains on my tax return?

Washington requires you to file a separate capital gains tax return (Form 706-WA) if you have long-term capital gains above the $250,000 threshold. This is filed with the Washington Department of Revenue, not with your federal return. You will also report the same gains on your federal return. Consult a tax professional if you have significant investment sales, as the rules around what qualifies and how to calculate the threshold can be complex.