Updated May 2026
The summer of 2025 brought significant tax law changes at both the state and federal levels. Washington State enacted several new taxes and expanded existing rules, while the federal One Big Beautiful Bill Act (OBBBA) introduced sweeping updates affecting individuals, business owners, charitable giving, and estate planning.
As implementation guidance has continued to evolve, several provisions have become more nuanced than initially understood.
Here’s an updated look at what changed—and what matters most heading into 2026.
Washington State Tax Changes—Key Takeaways
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
Washington’s estate tax exemption 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 Washington estate tax rate increased from 20% to 35%, significantly increasing the potential tax burden for high-net-worth estates.
Family-Owned Business Relief
The Qualified Family-Owned Business Deduction also increased to $3 million, offering additional flexibility for families passing down closely held businesses.
If your estate may approach these thresholds—or if future asset growth is expected—this may be a good time to revisit your estate planning strategy.
Transportation-Related Taxes & Fees
Washington State continues to rank among the highest gas-tax states in the nation.
Recent increases include:
- Gasoline tax increased by 6 cents per gallon
- Diesel tax increased by 3 cents per gallon
- Additional taxes and fees on certain luxury vehicles and non-commercial aircraft
B&O (Business & Occupation) Tax Increases
Many Washington businesses will see higher B&O taxes over the next several years.
Service Businesses
Beginning October 1, 2025, many service-oriented businesses with more than $5 million in annual gross receipts saw their B&O tax rate increase from 1.75% to 2.1%.
Additional Industry Increases
Beginning January 1, 2027, additional permanent rate increases are scheduled for certain manufacturing, wholesaling, retailing, extracting, and related industries.
Business owners may want to revisit:
- pricing models,
- entity structure,
- estimated tax planning,
- and long-term profitability assumptions.
Sales Tax Expansion on Services
One of the most significant—and widely misunderstood—Washington changes was the expansion of retail sales tax to additional services beginning October 1, 2025.
The law reaches beyond traditional “digital services” and may affect businesses providing:
- advertising and marketing services,
- IT and managed technology services,
- staffing services,
- website development and custom software work,
- security and investigation services,
- and certain digitally delivered professional services.
In many cases, businesses that historically never collected sales tax may now have collection and reporting responsibilities.
Additional guidance from the Washington Department of Revenue has clarified:
- sourcing rules,
- transition treatment for pre-existing contracts,
- and obligations for some out-of-state businesses serving Washington customers.
Because implementation details remain nuanced, businesses providing services should consider reviewing contracts, invoicing procedures, and taxability determinations with their tax advisor.
Capital Gains Tax Reminder
Although not part of the July 2025 changes, Washington’s capital gains tax increased by an additional 2.9% on gains exceeding $1 million, retroactive to January 1, 2025.
For taxpayers already subject to the 7% Washington capital gains tax, this creates a new top effective rate of 9.9% on qualifying gains above the threshold.
Federal Tax Changes Under OBBBA
The federal legislation signed in 2025 made many provisions of the 2017 Tax Cuts and Jobs Act permanent while introducing several new deductions, credits, and limitations.
Standard Deduction Increases
For 2025, the standard deduction increased to:
- $15,750 for single filers
- $23,625 for head of household
- $31,500 for married filing jointly
These amounts will continue to adjust for inflation going forward.
Additional Deduction for Older Taxpayers
A temporary additional deduction of $6,000 per taxpayer age 65+ is available from 2025–2028.
This deduction phases out once modified adjusted gross income exceeds:
- $75,000 for single filers
- $150,000 for married filing jointly
Child Tax Credit Boosted
The Child Tax Credit increased from $2,000 to $2,200 per qualifying child beginning in 2025.
Important details include:
- The credit directly reduces tax liability dollar-for-dollar
- A portion remains refundable, subject to income limitations
- Phaseout thresholds remain largely unchanged:
- $200,000 for single filers
- $400,000 for married filing jointly
SALT Deduction Expanded
The State and Local Tax (SALT) deduction cap increased from $10,000 to $40,000 for tax years 2025–2029 before scheduled reversion in 2030.
Income Phaseout
The higher deduction begins phasing out for taxpayers with modified adjusted gross income above $500,000.
For business owners, this provision also increases attention around:
- pass-through entity tax (PTET) elections,
- entity structure planning,
- and multistate tax coordination.
Tip Income Deduction
A temporary above-the-line deduction was introduced for qualifying tip income from 2025–2028.
Key Details
- Deduction limited to up to $25,000
- Applies only to occupations Treasury identifies as “customarily tipped”
- Phases out beginning at:
- $150,000 modified AGI for single filers
- $300,000 for married filing jointly
Payroll taxes on tips still apply.
As implementation guidance has evolved, employers and payroll providers have also faced additional reporting and tracking requirements related to qualifying income.
Overtime Pay Deduction
A temporary deduction for qualifying overtime premium pay is also available from 2025–2028.
Key Details
- Deduction limited to:
- $12,500 for single filers
- $25,000 for married filing jointly
- Applies only to the overtime premium portion required under federal labor law
- Subject to income phaseouts like the tip deduction
Employers may need additional payroll reporting procedures to separately identify qualifying overtime amounts.
Estate & Gift Tax Exemption Increased
The federal estate and gift tax exemption increased to approximately:
- $15 million per individual
- $30 million combined for married couples
These exemption amounts continue to adjust for inflation.
For families, this creates additional planning opportunities for:
- lifetime gifting,
- trust planning,
- business succession,
- and multigenerational wealth transfer strategies.
Charitable Giving Changes
Several charitable deduction provisions were updated under the new federal legislation, creating both new opportunities and new limitations for donors.
Above-the-Line Charitable Deduction Returns
Taxpayers who do not itemize deductions may now deduct charitable contributions of up to:
- $1,000 for single filers
- $2,000 for married couples filing jointly
This effectively restores and expands the temporary charitable deduction available during the pandemic years.
New AGI Floor for Itemized Charitable Deductions
Beginning in 2026, itemized charitable deductions become subject to a new 0.5% of adjusted gross income floor.
This means:
- only charitable contributions exceeding 0.5% of AGI will produce a deduction benefit.
For some taxpayers, this may reduce the tax efficiency of smaller annual gifts.
As a result, many donors are evaluating strategies such as:
- bunching charitable contributions,
- donor-advised funds,
- appreciated stock gifting,
- and accelerating larger gifts into favorable tax years.
These changes may be especially important for nonprofit donors, retirees, and high-income households with charitable intent.
Vehicle & Home Energy Credits
Several clean energy credits originally created under the Inflation Reduction Act ended sooner than originally anticipated.
Electric Vehicle Credit
The federal EV credit phased out after September 30, 2025.
Residential Energy Credits
The following credits expired December 31, 2025:
- Residential Clean Energy Credit
- Energy Efficient Home Improvement Credit
For many taxpayers, 2025 became the final major planning window for these incentives.
Auto Loan Interest Deduction
A temporary deduction of up to $10,000 for interest paid on qualifying new vehicles assembled in the United States was introduced for eligible low- and middle-income taxpayers.
Income limitations and vehicle qualification rules apply.
Questions?
Tax law changes rarely affect everyone equally. For some taxpayers, these updates may create new opportunities. For others, they may introduce additional compliance complexity or planning considerations.
Whether you’re:
- navigating charitable giving decisions,
- evaluating business tax exposure,
- reviewing estate planning strategies,
- or simply trying to understand how these changes affect your household,
now may be an excellent time to revisit your tax strategy with your tax or other financial professional.
