The first week in July was busy as far as tax law news is concerned. Not only did several tax law changes take effect in Washington State, but President Trump’s Big Beautiful Bill passed giving overhaul to our federal taxes.
Let’s take a look starting at what changed in Washington State as of July 1.
Washington State Tax Changes
Estate Tax Updates
If you’re planning to leave behind assets—or managing an estate or trust—you’ll want to take note of these changes:
- Higher Exclusion Amount: The estate tax exemption has increased from $2.193 million to $3 million per individual, meaning fewer estates will owe Washington estate tax.
- Higher Rates for Larger Estates: For estates valued over $9 million, the top tax rate jumps from 20% to 35%, significantly increasing the potential tax bill for high-net-worth estates.
- Family-Owned Business Relief: The Qualified Family-Owned Business Deduction has also been raised to $3 million, offering more breathing room for families passing down closely held businesses.
If you’re close to these thresholds—or anticipate future growth—it may be a good time to revisit your estate plan.
Transportation-Related Taxes & Fees
If you noticed a price increase at the pump, it wasn’t your imagination. Washington State now ranks among the highest gas tax states in the nation with the following:
- Gasoline Tax is now 55.4 cents per gallon—a 6-cent increase.
- Diesel Tax is up by 3 cents per gallon.
- Luxury Vehicle Fees: New taxes apply to noncommercial aircraft and high-end vehicles.
B&O (Business & Occupation) Tax Increases
Many businesses will see higher rates.
- Starting October 1, 2025, service‑oriented businesses with over $5 million in gross receipts will see their B&O rate jump from 1.75% to 2.1%
- January 1, 2027, brings permanent hikes in: Manufacturing, wholesaling, extracting, retailing, and similar categories.
Sales Tax Expansion & Increase
New taxable services starting October 1, 2025
- Senate Bill 5814 adds many digital and professional services to the sales tax base
Capital Gains Tax Reminder
Although not part of the July 1 changes, it’s worth noting that Washington’s capital gains tax increased by 2.9% on gains exceeding $1 million, retroactive to January 1, 2025.
Federal Tax Shifts
While Washington’s state-level changes tighten the belt in some areas, federal tax policy may soon shift in the opposite direction under the recently passed legislation. The final bill makes permanent Trump’s 2017 tax cuts while adding new items such as:
Standard Income Deductions
- The standard deductions for 2025 have been increased to $15,750 (single), head of household $23,625, and married filing jointly to $31,500, then inflation-adjusted.
- A temporary $6,000 deduction per taxpayer for ages 65+ will be available from 2025-2028. This deduction will phase out when modified gross income exceeds $75,000 (single) or $150,000 (married filing jointly).
Child Tax Credit Boosted
- The credit increases from $2,000 to $2,200 per qualifying child for tax year 2025 and beyond.
- Dollar-for-Dollar Reduction: as a non-refundable or partially refundable tax credit, which directly reduces your tax liability dollar for dollar, not a deduction.
- Refundable portion: The refundable part remains limited. It’s approximately $1,400–$1,700, depending on income, and is indexed for inflation.
- Income phaseouts: The credit begins to phase out at higher incomes—unchanged from pre-2025 thresholds ($200,000 single, $400,000 joint).
SALT Deduction Expanded
- New Cap: The State and Local Tax (SALT) deduction limit is raised from $10,000 to $40,000 for tax years 2025 through 2029 (it reverts to $10,000 in 2030)
- Income Phaseout: Applies to single or joint filers with Modified Adjusted Gross Income (MAGI) over $500,000 in 2025.
Tip Income Deduction
- Eligible: Traditional tip industries only (e.g., servers, bartenders, hair stylists—must be on the list Treasury will release, “traditional and customarily tipped” occupations)
- Deduction amount: Up to $25,000 of tip income is deductible from federal taxable income; this is an above-the-line deduction, so you can claim it even with the standard deduction.
- Phaseout: Begins at Modified AGI over $150,000 for single filers (and $300,000 for joint); deduction reduces by $100 per extra $1,000 income.
- Payroll taxes: Social Security and Medicare taxes on tips still apply—they’re unaffected
- Duration: Applies to tax years 2025 through 2028, with retroactive effect from January 1, 2025.
Overtime Pay Deduction
- Eligible pay: Only the overtime premium (i.e., the amount over regular pay when overtime is required under the Fair Labor Standards Act) is deductible.
- Deduction amount: Up to $12,500 per year for single filers ($25,000 joint), as an above-the-line deduction.
- Phaseout: Also starts phasing out at $150,000 Modified AGI (10% reduction per $1,000; threshold doubles for joint).
- Reporting: Requires separate reporting on your W‑2 or 1099; employers must implement withholding changes in 2026 (transition rules apply for 2025).
- Payroll taxes: No effect—Social Security and Medicare obligations remain.
- Duration: Valid tax years 2025 to 2028.
Estate and Gift Tax Exemption
The estate and gift tax exemption will rise from $13.99 million to $15 million per domiciled citizen or resident taxpayer. Married couples may transfer up to $30 million more in assets to their heirs during their lifetime or at death without triggering federal estate taxes. These exemption amounts will continue to be indexed for inflation, providing additional protection against rising costs and preserving more of a family’s legacy over time.
Charitable Deductions
Charitable deductions saw two major changes. First, a new above-the-line charitable deduction of up to $1,000 per person ($2,000 for married couples) was introduced for those who don’t itemize—essentially bringing back and expanding the temporary provision that had expired in 2021. This means taxpayers can now get a tax break for charitable donations without needing to itemize their deductions.
Second, for those who do itemize, the bill adds a 0.5% of AGI floor for charitable deductions, similar to how medical expenses must exceed a percentage of income to qualify. This means only charitable contributions that exceed 0.5% of your adjusted gross income will count, potentially limiting the benefit for some filers.
Vehicle and Home Energy Credits
Clean energy tax credits created under the Biden-era Inflation Reduction Act are being eliminated sooner than originally planned. Specifically, the federal electric vehicle (EV) tax credit will fully phase out effective Sept. 30, 2025, and the residential clean energy credit and energy home improvement credit both expire on December 31, 2025.
Auto Loan Interest Deduction for Everyday Drivers
Up to $10,000 in auto loan interest on new cars assembled in the United States would become deductible for low- and middle-income taxpayers—a rare break for those financing vehicles in a high-interest-rate environment.
For more details about the recent federal legislation, see this article from CNBC.
Questions?
If this article has raised questions about how these changes might impact your personal or family’s tax situation, we’re here to help. Whether it’s understanding how the new estate tax thresholds affect your legacy planning or making the most of upcoming federal deductions, now is a great time to revisit your tax strategy and schedule a tax planning meeting with your client manager.
