Washington does not have a 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, you do not owe state income tax on your paycheck, no matter how much you earn. The state funds itself through other taxes instead: sales tax, property tax, and business taxes.

This means your federal income tax return works the same way whether you live in Washington or anywhere else. You still file Form 1040 with the IRS and pay federal tax based on your income. Washington straightforward does not add a state layer on top of that.

However, Washington does tax certain types of income that are not wages. Understanding what is and is not taxed in Washington matters if you have investment income, retirement withdrawals, or business earnings.

Key Takeaways

  • Washington has no state income tax on wages, salaries, or most other personal income.
  • Washington taxes capital gains (profits from selling stocks, real estate, or other investments) at 7 percent if you sell more than $250,000 worth in a year.
  • You still file federal income tax returns as usual; Washington's lack of state income tax only affects your state return.
  • Washington funds state services through sales tax (which varies by county), property tax, and business taxes instead of income tax.

What Washington does tax: capital gains

In 2022, Washington introduced a tax on capital gains — the profit you make when you sell an investment. If you sell stocks, bonds, mutual funds, real estate (other than your primary home), or other assets for more than you paid, that profit is subject to Washington's capital gains tax.

The tax applies only if your total capital gains in a year exceed $250,000. Below that threshold, you owe nothing. Above it, you pay 7 percent on the gains that exceed $250,000. This is separate from federal capital gains tax, which you still owe to the IRS.

Your primary residence is exempt — selling your home does not trigger this tax. Retirement account withdrawals from IRAs and 401(k)s are also exempt, as are gains inside those accounts while the money sits there.

Who files a Washington state return

Most people who work in Washington do not file a separate state income tax return because Washington has no income tax. You file only your federal Form 1040 with the IRS.

The exception is if you have capital gains over $250,000 in a year. Then you file Form 1040 with the IRS as usual, and you also file Washington Form 1040-S (the state capital gains return) with the Washington Department of Revenue. The form is straightforward: you report the total capital gains, subtract the $250,000 threshold, and calculate 7 percent of the remainder.

If you live outside Washington but work there, or work outside Washington but live there, the same rules explore. Washington taxes capital gains for anyone who is a resident or has income-producing property in the state.

How Washington's sales tax affects your budget

Because Washington has no income tax, the state relies heavily on sales tax. Washington's state sales tax rate is 6.5 percent, but most counties add a local sales tax on top of that. Depending on where you shop, the total can range from 8 percent to over 10 percent.

This means you pay tax on most purchases — groceries, clothing, gas, restaurant meals — at the point of sale. There is no deduction or refund. Over a year, this can add up to more than an income tax would for some households, especially those with lower incomes that spend most of what they earn.

A few items are exempt from sales tax in Washington: prescription medications, medical equipment, and some foods bought at grocery stores (though prepared foods and restaurant meals are taxed). If you move to Washington from a state with income tax, expect to notice the sales tax more in your daily spending.

Property tax and other Washington taxes

Washington also funds schools and local services through property tax. The state property tax rate is 0.84 percent to 0.98 percent of home value, depending on the county. Local school districts and counties add their own levies on top of that.

Businesses in Washington pay a business and occupation tax (B&O tax) based on their gross revenue, not profit. If you are self-employed or own a business, you may owe this tax in addition to federal self-employment tax.

Washington also taxes certain services and activities: gambling, liquor, cigarettes, and vehicle licenses all carry state taxes or fees. These are smaller revenue sources than sales tax and property tax, but they contribute to the state budget.

How to handle your taxes if you move to or from Washington

If you move to Washington during the year, you become a resident on the date you arrive. From that date forward, you are subject to Washington's capital gains tax (if applicable) but not to income tax. Your federal return covers the whole year and accounts for income from both states if you worked in multiple places.

If you move away from Washington, you stop owing Washington taxes on income earned after you leave. However, if you sell an investment after moving but the gain came from an investment you owned while a Washington resident, the rules depend on when you bought and sold. The safest approach is to contact the Washington Department of Revenue or consult a tax professional if you have significant capital gains and a recent move.

Some states tax residents on worldwide income even after they move away, but Washington does not. Once you are no longer a resident, you owe Washington nothing on new income or gains.

Frequently Asked Questions

Do I have to file a Washington state return if I have no capital gains?

No. If you have no capital gains over $250,000, you do not file a Washington state return. You file only your federal Form 1040 with the IRS. Washington has no income tax return for wage earners.

What counts as a capital gain in Washington?

A capital gain is the profit from selling an investment — stocks, bonds, mutual funds, rental property, or other assets. If you buy a stock for $1,000 and sell it for $1,500, your gain is $500. Your primary home is exempt. Retirement account withdrawals are also exempt.

If I live in Washington but work in another state, do I owe Washington tax?

You do not owe Washington income tax (Washington has none). You owe income tax to the state where you worked. However, if you have capital gains over $250,000 while a Washington resident, you owe Washington's capital gains tax regardless of where the income came from.

Is Washington's 7 percent capital gains tax the same as federal capital gains tax?

No. They are separate taxes. Federal capital gains tax rates are 0, 15, or 20 percent depending on your income level. Washington's 7 percent applies only to gains over $250,000 per year. You may owe both.

What if I sell my home — do I owe capital gains tax?

No. Your primary residence is exempt from Washington's capital gains tax, even if you make a large profit. If you sell a rental property or investment property, that gain is taxable.