If you’ve lived in Washington for more than a minute, you know we’ve always had a weird relationship with taxes. No income tax. High sales tax. It’s been the "Washington way" forever. But honestly, that’s shifting fast. As of January 2026, the playbook has changed so much that even people who follow this stuff for a living are scratching their heads.
It's a lot.
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The big one everyone is talking about—the "Millionaire’s Tax"—is finally a reality. Governor Bob Ferguson signaled his approval for a 9.9% state tax on individuals pulling in more than $1 million a year. It’s basically an income tax by another name, even if the politicians in Olympia are careful about how they phrase it. But if you think that’s the only new tax in Washington state you need to worry about, you're gonna be surprised. From your paycheck to your morning vape, the state is digging deeper into almost everyone's pockets this year.
The Big Squeeze on Your Paycheck (PFML and Beyond)
Most people don’t notice the tiny deductions on their paystubs until they realize their take-home pay hasn't moved despite a raise. Starting January 1, 2026, the Paid Family and Medical Leave (PFML) payroll tax jumped again. It’s now 1.13%.
That might sound like pennies. It isn't.
If you’re making the average Washington wage—somewhere around $95,000—you’re looking at over $760 a year just for this one program. Employers are picking up about 28% of the tab, but the rest is on you. The program is facing some serious math problems, with projections showing a $350 million deficit by 2029, so don't be shocked if this rate creeps up toward the 2% cap sooner rather than later.
Then there's the WA Cares Fund. It’s still there, still taking 0.58% of your gross wages for long-term care insurance you might never use. When you stack these together, Washington has basically built a "shadow" income tax through payroll deductions. It’s a death-by-a-thousand-cuts situation for W-2 workers.
The Capital Gains Evolution
Remember when the 7% capital gains tax was the biggest controversy in the state? That feels like a lifetime ago. Now, we have a tiered system.
The first $1 million in long-term capital gains is still taxed at 7%. But anything over that $1 million mark? That’s now getting hit with an additional 2.9% surcharge, bringing the total state bite to 9.9%.
This is huge for anyone looking to sell a business or a large stock portfolio. If you combine that 9.9% state tax with the 20% federal capital gains rate, you're looking at a 30% total tax hit. Suddenly, Washington isn't the tax haven it used to be compared to places like California or Oregon. The "tax advantage" for high-earners has effectively evaporated for major exit deals.
What about exemptions?
Thankfully, some things are still safe. You generally don't pay this on:
- Residential real estate sales.
- Retirement accounts (401ks, IRAs).
- Family-owned small businesses (under certain revenue thresholds).
- Timber and livestock.
The "Sales Tax Expansion" You Probably Missed
This is the one that’s actually hitting the most people, yet it’s the least understood. A massive $9 billion revenue package passed recently, and it fundamentally changed what gets a sales tax sticker.
Starting late 2025 and moving into 2026, the definition of "retail sales" grew. You know those "professional services" that used to be tax-exempt? A lot of them aren't anymore.
If you’re a business owner hiring a temporary staffing agency, you’re likely paying sales tax on that now. Custom software development? Taxed. Even live presentations and certain types of IT training have been pulled into the net. The Department of Revenue (DOR) is basically telling businesses to "pay now, ask for a refund later" if they aren't sure. It’s a mess.
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Honestly, it’s a bit of a nightmare for freelancers and small agencies. If you're providing "digitally automated services" that used to be excluded because they involved "primarily human effort," you might want to check the new DOR guidance. The lines have blurred, and the state is definitely leaning toward "tax it."
Sin Taxes and the "One Big Beautiful Bill"
If you vape or use nicotine pouches, 2026 is going to be expensive. A new law (Senate Bill 5814) applies a whopping 95% excise tax to all nicotine-containing products, including synthetic nicotine and vapes.
Think about that. A $7 pack of nicotine pouches that used to cost maybe $7.70 after sales tax in Seattle is now gonna run you over $15. It’s one of the highest nicotine taxes in the country.
On the federal side, we're also dealing with the fallout of the "One Big Beautiful Bill" (OBBBA) passed in mid-2025. While that’s federal, it interacts with Washington’s lack of income tax in weird ways. For example, the return of 100% bonus depreciation for real estate is a massive win for property owners here, potentially offsetting some of the local property tax hikes we're seeing.
Property Tax: The 2026 Reality
Property taxes in Washington are tricky because they’re tied to the "limit factor." For 2026, the inflation rate (IPD) used for these calculations is 2.44%. Most taxing districts are limited to a 1% increase in the total amount they collect, plus new construction.
But there’s a catch.
School enrichment levies are going up. If you live in a district that passed a new levy, your bill is going to jump regardless of that 1% state cap. On the flip side, if you're a disabled veteran, there’s some good news. The disability rating required for a property tax exemption dropped from 80% to 40% starting this year. That’s a massive relief for thousands of former service members.
Real-World Action Steps
Navigating a new tax in Washington state isn't just about complaining at the dinner table; it’s about moving your money.
First, if you're an independent contractor or business owner, audit your invoices immediately. The new sales tax rules on services are "sticky." If you don't collect the tax from your client, the DOR will eventually come looking for it from you. Use the DOR’s interim guidance—it’s complicated, but better than a surprise audit.
Second, if you’re staring down a big capital gain, look into Qualified Small Business Stock (QSBS) or installment sales. Since the new 9.9% rate kicks in at $1 million, spreading a sale over two years could literally save you tens of thousands of dollars.
Finally, check your paystub. If you’re a W-2 worker, make sure your employer has updated the PFML rate to 1.13%. It’s better to have the correct amount taken out now than to face a weird correction later in the year.
Washington is no longer the "simple" tax state it used to be. It’s tiered, it’s targeted, and it’s increasingly focused on payroll and high-end gains. Staying ahead of it is the only way to keep your head above water.