There’s more to guarding your wealth in this economy than many realize. It is unrelenting, it is callous, and it calls for a deep knowledge of an ever changing financial landscape. But there’s a special tax issue, and it’s the capital gains taxes in particular.
Take Washington State. On the surface, their new capital gains tax seems simple, but look again because it’s riddled with nuance and depth that could easily trip up the best and brightest investor. And that’s where Dominion comes in.
We will help you get through the turbulent waters we are in – we will protect your wealth with our clarity and expertise. Our solutions allow us to design strategies meant just for you. Now you can welcome the future with confidence.
What’s the Washington State Capital Gains Tax All About?
Starting from the 1st of January 2022, it charges a 7% tax on long-term capital gains. This tax is now important to understand that it is not a tax on corporations, but on individuals. Thus, if you are a high net worth individual with much in assets this has a direct effect on you.
This is where things get interesting. Washington State defines tangible and intangible personal property, and the distinction between the two is crucial as to how the tax applies. Physical assets such as planes, artwork, cars and yachts are tangible personal property. Assets that are intangible personal property include stocks and intellectual property.
The tax applies to tangible assets if the asset was located in Washington at the time of sale. In this case, it also applies if the asset was in Washington while it was in the sale year – or the year preceding the sale – or if you were a Washington resident while in the sale year and there is no other jurisdiction taxing those gains. You can see it gets a little complicated.
Residency, Abode, and Domicile: Key Definitions
So, let’s get into some important definitions. We’ve seen that the Washington capital gains tax turns on concepts like “residency,” “abode,” and “domicile.” These are the factors that will determine if you are liable for this tax.
Residency
A “resident” is defined by the law as a person domiciled in Washington, except that a person who has no permanent place of abode in the state, maintains a permanent place of abode outside of Washington, and spends less than 30 days in Washington is not a resident. Also, a person is considered resident if physically present in Washington more than 183 days, regardless of not being domiciled there. Clear as mud, right?
Domicile
After that is “domicile.” Although you aren’t living there right now, it’s sort of your real home and somewhere you want to go back. There’s a catch, because the legislation doesn’t really define domicile. If you don’t have a straightforward living situation, this lack of transparency can cause problems and even uncertainty.
Abode
A “place of abode” is equally vague. It usually means any house or place where you live. And you can have multiple abodes, which complicates things even further.
Why does all this matter? Capital gains for you are not only from Washington State, but from whether or not Washington has the right to tax under the situation of your residency, domicile and places of abode.
Naturally, if you misuse these terms, or don’t properly document your situation, you can end up with an unexpected tax bill and even a legal challenge. Understanding these definitions is not to be underestimated – they are the basis of your tax strategy in Washington State.
Calculating Your Capital Gains Tax: Adjustments, Deductions, and Credits
Alright, so now we can calculate this tax. It’s not as simple as multiplying your gains by 7%. Your federal net long term capital gain starts the process. This is the number you will see on your federal income tax return.
However, you have to adjust. You’ll put back in any long-term losses that Washington doesn’t tax. On the other hand, you’ll subtract any gains that aren’t allocated to Washington. That way you’re only taxing the gains that Washington actually has a claim on.
Now, for the deductions. A standard deduction of $250,000 is given to everyone. It doesn’t matter if you are single, married, or in a domestic partnership. If you sold a qualified family-owned small business, you can deduct the gain from that sale. Don’t forget charitable donations, either. If the charity is primarily located in Washington, you can deduct donations over $250,000, up to a limit of $100,000.
There is also a credit for taxes paid to other jurisdictions. If you have already paid taxes on your gains to another State or country, you may get a credit for that amount against your Washington tax liability.
Suppose you have $500,000 in federal net long-term capital gains, all from the sale of stock in a company while domiciled in Washington. You have $250,000 in taxable gains because you get the $250,000 standard deduction. But, at a 7% tax rate, that tax would be worth $17,500 ($250,000 x 7%). If you had already paid $5,000 in taxes to another state on those gains, your Washington tax bill would be $12,500.
You can see how quickly these calculations can get complicated. Dominion helps make sure you have accurate records and a basic understanding of the numerous adjustments, deductions, and credits available to you.
What You Need to Know About Exemptions
The good news is not all capital gains are subject to this tax. But there are some significant exceptions you need to be aware of. First, all gains from the sale of real estate are completely exempt.
From your main home to vacation homes to land, this all counts. It also includes the gains from the sale of an interest in an entity that directly owns real estate so long as the entity owns the real estate.
But it’s not always plucking off the top $10,000; there is some calculation involved and some specific rules, so it’s not just a straightforward exemption.
Then, your retirement accounts are safe. That means your 401(k)s, IRAs, Roth IRAs, and other retirement vehicles are exempt from the capital gains tax. That’s a huge relief for people who have been dutifully saving for their golden years. Other exempt assets include:
- Assets that are about to be condemned.
- Certain livestock
- Depreciable property
- Timber and timberland
- Commercial fishing privileges
- The sale of an auto dealership goodwill
If you’re selling a family-owned small business, you may be able to deduct the gain from that sale. You must have held an interest in the business for at least five years, and you or your family must have been actively involved in the business for at least five of the ten years before the sale. The business must also have had less than $10 million in revenue in the year before the sale.
Knowing this is important so you can minimize your tax liability. Just because you have gains doesn’t mean they are automatically taxable – there are exemptions. Check them out to see if any of them apply to you. And since we’re here to help you with this and so much more, don’t hesitate to get in touch with us for the best support.
Strategies for Reduce Your Tax Burden
Next, strategy. In Washington, you have to be very deliberate to reduce your capital gains tax load. You have to project it and play around with your money.
Qualified Small Business Stock (QSBS) is one way to do this. But what is it, exactly? This is stock in some small businesses that meet certain criteria. If you keep the stock for at least five years, you may eliminate a good portion of the sale’s gain. Your federal capital gains start with the QSBS exclusion, and Washington implicitly allows this exclusion.
Another way is to use installment sales. If you sell an asset and get paid over time, you only pay tax on the gains as you receive the payments. This can allow you to spread out your tax liability and maybe lessen your entire burden.
But here’s the key takeaway: There is a need for proactive planning. You don’t want to wait until you’re staring at a large capital gain and think about taxes. Your overall strategy should be developed with your advisors in accordance with your long run monetary aims.
For example, you may want to diversify investments, organize business holdings with the help of legitimate start up firms better, or perhaps, if this is really what you should do, look into a change of residency. The sooner you plan, the more ways you’ll have to optimize your tax outcomes.
Partner with Dominion Today
This tax landscape is clearly complex. That’s where Dominion excels, however. We have an unmatched knowledge of tax laws and asset protection strategies in Washington State and around the world. Regardless of how complex the rules become, we want to provide you with tailor made solutions to protect your wealth.
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