Ah, tax law changes—there’s nothing quite like them.
And recently, Washington passed two new tax bills that are generating a lot of buzz: the state capital gains tax and the long-term care tax.
What are these tax law changes, and how could they impact you?
It’s time to find out.
The Capital Gains Tax
Before you panic, know that neither law is final as there are several pending lawsuits.
The capital gains tax law was passed in April 2021 and went into effect on January 1, 2022. But the law doesn’t mandate first payments until 2023.
Here’s the gist: the law imposes a 7% tax on the profits of selling long-term assets above $250,000 annually. This quarter-of-a-million-dollar sale threshold applies to single and married filers, though the state estimates that less than 1% of the population would have to pay this tax.
It’s also important to note that only profits above the $250,000 mark would be subject to the additional 7% tax. Say, for example, you sold a stock for a $300,000 profit. Under the law, you would have to pay 7% on the $50,000 above the threshold, not the entire amount, meaning you’d owe $3,500.
The capital gains tax applies to tangible (art, collectibles, etc.) capital assets (stocks, bonds, real estate, etc.) and other intangible (patents, copyrights, etc.) personal property. But some assets like real estate, retirement accounts, and more are exempt from the tax.
You don’t have to worry about the law yet as it’s getting plenty of face time in court. Those opposed to the law say that the additional tax is a form of “graduated income tax,” violating the state constitution. We’ll continue to monitor the situation and will be prepared to help you adjust realizing capital gains as necessary.
Long-Term Care Tax
You’ve heard about the WA Cares fund, right—the first-ever state-run long-term care program?
Here’s how it was supposed to work. Starting in January 2022, workers would have a 0.58% payroll tax on their total wages (without a salary cap), which would be funneled into the system’s trust. Eligible participants could receive a $36,500 total benefit for their lifetime for long-term care, and the first beneficiaries could receive funds as early as 2025.
What if you didn’t want to pay the tax? To opt-out, you had to acquire long-term care insurance by last November 2021 or file an exemption. Both employers and self-employed people are also exempt from the tax.
But while the WA Cares fund had good intentions, its problems quickly bubbled to the surface.
- People who work in WA but retire out of state wouldn’t be able to access the benefits.
- Those on the cusp of retirement may not meet the eligibility requirements (3 consecutive years of payments) for benefits.
- Not everyone who works in WA lives there, which could mean workers have to pay for benefits that they can’t ever access.
Lawmakers have drafted a couple of bills to address these critical concerns. One is to pause the payroll tax until 2023, and another addresses residency concerns, allowing more people to opt-out if necessary.
Another thing to note is that if you’ve had your premiums withheld, they should be refunded to you until the effective date of the Bill.
In Other State News…
The state legislature hasn’t only been cooking up plans to increase taxes; additional changes are on the horizon for 2022.
- Higher minimum wage.
- The state minimum wage is jumping to $14.49 an hour.
- In Seattle, companies with over 500 employees will have a minimum wage of $17.27 an hour.
- Increased state spending
- The Governor’s $4 billion supplemental budget plans to allocate more funds to address critical issues like homelessness, poverty, and climate change.
- Broader voting eligibility
- This bill restores voting rights to former felons who are no longer incarcerated, meaning those on probation or parole.
- Improved climate action
- Several bills were passed to address climate change, like lowering the carbon intensity of transportation fuels and reducing greenhouse gas emissions.
- Say goodbye to single use-plastics
- WA is making a concerted effort to reduce single-use plastics by prohibiting businesses from automatically including plastic utensils, cups, packets, etc., with food orders—though customers can still ask for them.
With the Washington legislature in season, several more updates could come soon.
What Happens Next?
Now, it’s a wait-and-see situation as both tax laws are being contested in court. Know that we’re staying abreast of the potential law modifications and how they could affect your financial plan.
We’d love to help you find confidence in your money no matter what changes lie ahead; set up a time to connect with us today.
