A Q&A on upcoming tax returns for Washingtonians with a Bellevue accountant
With an April 18 tax deadline approaching, there might be some surprises for those filing in Washington state. Kenneth Williams, a principal at Bellevue’s Clifton Larson Allen and longtime tax specialist, joins Seattle’s Morning New’s Dave Ross for a question and answer session on what Washingtonians should expect as they file this year’s tax returns.
First of all, tell me about the status of the Washington capital gains tax. When will we have to start worrying about that?
The Washington capital gains tax is something that’s currently in play. We either may have to worry about it now, or we may not.
There was a capital gains tax instituted by the state last year. Just recently, that tax was challenged. The Court said that it was unconstitutional. The State immediately responded, and just this week said that they are going to take it to the state Supreme Court.
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We’re kind of in a waiting game. The tax is effective for 2022. Individuals with capital gains over $250,000, anytime from January 1, 2022 forward, are going to be subject to this tax unless it is overturned. A lot of people are worried about how this is going to affect transactions they’ve already had or ones that they’re contemplating.
This would not affect any transactions in 2021, though, right?
That’s correct. In 2021, the tax did not apply. There were a lot of people accelerating transactions into last year to recognize gain before this new tax kicks in.
Now, this will show up automatically in your tax return software, if that’s what you use, should this actually get through the courts?
We hope so. Washington state has already indicated that they are proceeding with the assumption that the tax is going to be sustained by the Supreme Court. The first filings won’t be until 2023. There’s nothing to do on your 2021 return. There’s no tax to remit until next year, April of 2023. As to what software will accommodate this tax, we’ll just have to wait and see.
Now there’s also an issue involving the Washington estate tax, some of the limits may be changing there as well. Where does that stand?
The federal estate tax currently allows individuals to exclude up to $12 million of their estate. Washington state’s estate tax is a much lower threshold, about $2 million per person. It affects a lot more people. It’s kind of a stealth tax, one that people aren’t aware of.
But when you add up property appreciation in the area, as well as maybe some retirement benefits and life insurance policy, it’s not hard to get over that $2 million, and all of a sudden be subject to a tax that could be as much as 20% of the total value of your estate.
As this includes the appreciated value of your home, I suddenly find that I know a lot of millionaires. You’re right, this could affect a lot of people.
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I moved to the Seattle area in 1975. My first home with my parents’ purchase was $40,000 is probably worth more than a million dollars today. Many people find themselves in that circumstance, when you’ve got a substantial value in your home and then a retirement account, then maybe you have a life insurance policy through your employer for some additional investments. It doesn’t take long to get over that threshold. It takes some planning to be able to avoid that estate tax.
Do you have clients who are thinking of moving out of the state to avoid this estate tax?
We’re getting more and more calls from people concerned about this. It started last year, people were starting to say, ‘between this capital gains rate in Washington, and an estate tax in Washington at a low threshold, maybe I’m better just moving out of the state.’
We’ve had many people either deciding not to move into the state, not to start their business here because they don’t want to have value concentrated in the state where they might be subject to these taxes. Or, they’re contemplating a transaction and saying, ‘I think I’m gonna just move to Nevada, Texas, or someplace else so I can avoid having to pay tax on these appreciated assets.’
What do you advise them because there’s always a chance the state you move to might also end up adopting it. States are always looking for money.
States are getting more and more hungry for new sources of revenue for the average person. There are things that you can do to minimize the estate tax. There are a lot of people wondering whether or not this capital gains tax is going to be sustained or overturned. There’s arguments on both sides. We’ll just have to see where the state Supreme Court lands.
There are things that can be done to minimize or eliminate the tax if you have a modest estate.
Yeah, that’s right. Well, you can start giving away money to your kids without paying tax. What is the limit?
For this year, $16,000 per person, per year. For Washington State, there’s no limit on your ability to gift. That’s one way that you can reduce the estate tax to zero, you just have to be mindful of the federal estate tax, which has limits on how much you can gift. Whatever you gift during your lifetime reduces the amount that’s excludable, from your estate upon your death.
Okay, one other annoying thing, sometimes you’ll file your taxes, and you’ll congratulate yourself that you got them in early, and then you get a revised 1099 form from a brokerage or from a bank or some other institution. What do you do then?
We see that a lot. Brokerages are having to revise these statements more and more. While you’re receiving that notice, the IRS is receiving the same information. They will eventually match what’s been reported to them to your return. If it’s different, you may get the dreaded CP 2000 notice, which sounds horrifying, but they just are saying, ‘we see this number on your return, but this is what was reported to us.’
To avoid that correspondence, individuals need to go ahead and amend their returns to report the correct amounts.
But just between you and me, I keep hearing that they are way understaffed at the IRS. Do they have the personnel to send out those notices anymore?
Well, they don’t have the personnel. Unfortunately, for most of us, their computers are pretty good at this. The C-P in CP 2000 stands for computer produced. No human hands were used in the mailing of those notices. That won’t stop them. It’s easy for the computer to kick those notices out.
So it’s you against the computer. We know who wins that one, don’t we?
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