If you live in Washington or have assets in the state of Washington and have questions regarding the estate tax, you’ve come to the right place.
Washington is one of 12 states in the US that imposes an estate tax. The tax is progressive and ranges from 10% to 20%, depending on the decedents assets.
The Washington estate tax will only apply to estates that have $2.2 million and up. This may sound like a high exemption amount, but when you consider all the assets a person has it might not go too far. This is especially the case with so many high income people working at Microsoft and Amazon. Just based on stock grants, many Washington residents can hit this threshold pretty easily.
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Washington estate tax and exemption amount
As stated the exemption threshold is $2.2 million. This is indexed every year and of course is subject to change.
The state of Washington has had many recent debates on the thresholds and exemption amounts. So be careful. You might see the exemption substantially lowered in future years which will catch many more residents in the estate tax.
But the good news is that if your state is below $2.2 million then you don’t have anything to worry about.
Washington estate tax rate
As stated previously, Washington has an estate tax with a progressive structure. The rate increases as the assets exceed a specified threshold.
The first million dollars above the estate tax exemption is taxed at a marginal rate of 10%. But a 20% rate is charged for any estates that are over $9 million over the estate tax exemption. This makes the Washington estate tax one of the more costly and highest rates in the country.
How does the estate tax work?
The estate tax is levied against assets that exceed the threshold. The decedent must take gross assets and then deduct other debts, such as mortgages and credit cards. Then you can reduce it by certain administrative expenses and other costs. If the resulting amount is below the exemption threshold, no taxes are assessed.
So even though there is a Washington estate tax to consider, there is also a federal estate tax. The calculation is similar, but the thresholds and exemption amounts are calculated differently.
Some people call the estate tax the death tax. No matter what it is called, it can be very costly in the state of Washington and at the federal level.
Gift tax and inheritance tax
The good news is that Washington has no gift tax, but the IRS does impose a federal gift tax. The federal gift tax allows you to give up to $15,000 a year and not be subject to a gift tax return.
Another issue to consider is that the Washington estate tax is not portable for married couples. So when one spouse dies they are not allowed to roll over any unused exemption to the surviving spouse. Only one exemption for the surviving spouse will apply.
How to Reduce or Legally Avoid the Washington Estate Tax
Below are some tips and strategies that you can consider to minimize the impact of any estate tax:
- Qualified Personal Residence Trusts (QPRTs)
- Grantor Retained Annuity Trusts (GRATs)
- Minor Trusts
- Qualified Terminable Interest Property (QTIP)
- Dynasty Trusts
- Charitable Gift Annuity
- Grantor Retained Unitrusts (GRUTs)
- Direct Medical and Tuition Payments
- Gifts Below Annual Exemption
- 529 Plans
- Special Valuation of Farms and Businesses
- Family Limited Partnerships (FLPs)
- Donor-Advised Funds
- Irrevocable Life Insurance Trust (ILIT)
- Charitable Remainder Trusts (CRUT)
- Crummey Trusts
- Grantor Retained Income Trusts (GRIT)
- Intentionally Defective Grantor Trust (IDGT)
There are certainly many pros and cons to Washington’s overall tax structure. The good news is that Washington has no state income tax, which means that retirement, Social Security, and other pensions are not taxed. For this reason, it is a very popular place for retirees and people with low amounts of earned income.
However, Washington does have a very high sales tax rate. The state imposes 6.5% and then county rates will apply. This will usually bring the overall sales tax assessment to 8% to 10%. Washington property taxes are about average with a effective property tax rate of around 1%.
While Washington does have the benefit of no state income tax, it assesses a very high estate tax amount. In addition, the exemption is on the low side. This means that many people will get caught paying Washington estate tax, but not the federal estate tax.
If you have estate tax questions, make sure to discuss them with the appropriate tax and legal professionals. There are certainly many strategies that can be implemented to mitigate any Washington estate tax.